Edited version of private advice

Authorisation Number: 1051615145944

Date of advice: 11 May 2020

Ruling

Subject: GST and sale of property by mortgagee in possession

Question

Did you make a taxable supply pursuant to section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sold property situated at a specified location?

Answer

No

This ruling applies for the following period(s)

1 July 20XX - 30 June 20XX

The scheme commences on

30 January 20XX

Relevant facts and circumstances

Individual A acquired the property situated at a specified location (the Property).

The Transfer of Land was registered on dd/mm/yyyy.

On dd/mm/yyyy, a mortgage (the Mortgage) was entered into between Individual A (Mortgagor) and a financial institution (You) as mortgagee.

You made an offer of loan to Individual A on dd/mm/yyyy under the Residential Loan Agreement Offer (Loan Agreement).

The offer was accepted by Individual A on dd/mm/yyyy. The security was the Mortgage.

Individual A subsequently defaulted on the Loan Agreement.

You issued a default notice to Individual A on dd/mm/yyyy and ultimately took possession of the Property on dd/mm/yyyy.

Individual A in his capacity as an individual held legal title to the Property as at dd/mm/yyyy.

On dd/mm/yyyy you entered a Contract of Sale (Contract) as vendor in relation to the sale of the Property.

You sold the Property as mortgagee under Mortgage Registered No. XXXXXXXXX.

The settlement and sale of the Property took place on dd/mm/yyyy.

The Property was sold with vacant possession, and the Property was not rented out when it was sold.

The contract sale price was $x,xxx,xxx.

Publicly available information obtained from the Australian Business Register show Individual A was allocated an Australian Business Number (ABN) effective from dd/mm/yyyy Individual A has no history of being registered for GST.

Individual A has not given you a written notice stating that had he sold the Property, the supply would not have been a taxable supply and you are unable to obtain such a notice including the reasons the supply would not have been a taxable supply. Your lawyers' file records indicate that a request for a notice was sent to Individual A by your lawyers but they did not receive any response.

It seems to you based on the information you have that you are able to believe on the basis of reasonable information that the sale of the Property would not have been a taxable supply if Individual A had made it.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 23-5

Subsection 105-5(1)

Paragraph 105-5(1)(b)

Subsection 105-5(3)

Subsection 188-10(1)

Section 188-15

Section 188-20

Section 188-25

Reasons for decision

Note: In this reasoning, unless otherwise stated,

·         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·         reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Subsection 105-5(1) states:

You make a taxable supply if:

(a)   you supply the property of another entity (the debtor) to a third entity in or toward the satisfaction of a debt that the debtor owes to you; and

(b)   had the debtor made the supply, the supply would have been a *taxable supply.

(An asterisk denotes a defined term in section 195-1 of the GST Act.)

However, subsection 105-5(3) provides that the supply will not be a taxable if

·         the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

·         if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

A reference to the term 'taxable supply' in paragraph 105-5(1)(b) and subsection 105-5(3) is a reference to the term as defined in section 9-5. Section 9-5 provides that you make a taxable supply if:

·         you make the supply for consideration; and

·         the supply is made in the course or furtherance of an enterprise that you carry on; and

·         the supply is connected to the indirect tax zone (Australia); and

·         you are registered or required to be registered for GST.

However the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case you are making a supply of the Property by exercising your rights in accordance with mortgage/loan documentation (Mortgage Registration Number AB123456C).

The issue in this case is whether, if the Mortgagor (Individual A) had made the supply of the Property, the supply would be a taxable supply. More specifically, as the Mortgagor was not registered for GST, the issue is whether the Mortgagor was required to be registered.

Section 23-5 provides that an entity is required to register for GST if carrying on an enterprise and it's GST turnover meets the registration turnover threshold (currently $75,000 unless a non-profit body).

Individual A was issued an ABN effective from dd/mm/yyyy. Section 8 of A New Tax System (Australian Business Number) Act 1999 provides that you are entitled to an ABN if:

(a)  you are carrying on an enterprise in Australia; or

(b)  in the course or furtherance of carrying on an enterprise, you make supplies that are connected with the indirect tax zone.

The allocation of an ABN is prima facie evidence that Individual A is, or was at some stage, carrying on an enterprise thus satisfying the first criteria for GST registration in section 23-5.

The next issue to consider is whether the GST turnover generated from the activities of the enterprise met the GST registration turnover threshold. ATO information is inconclusive as to the level of turnover generated by Individual A during the relevant period spanning your supply of the Property, being the settlement date of dd/mm/yyyy. The only information available is in relation to the proceeds from the sale of the Property.

Based on the available information provided it has been established the turnover is limited to that generated from the sale of the Property being $x,xxx,xxx.

Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

(a)  your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)  your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Taking into account the information available, both information available within ATO systems and information provided by you, there is nothing to suggest the Property was a trading or revenue asset. We consider that it is reasonable to conclude that the Property was a capital asset in the hands of Individual A. Thus, the turnover generated by the sale of the Property would not be included in the 'projected turnover' calculation of Individual A, had Individual A sold the Property.

In the absence of information to the contrary, we consider that it is reasonable to conclude that Individual A was not required to be registered for GST. Thus, had Individual A, as Mortgagor/debtor, made the supply of the Property, the supply would not be a taxable supply as defined in section 9-5.

Consequently, in conclusion, you have not made a taxable supply pursuant to subsection 105-5(1) when you sold the Property as mortgagee in possession.

Also, in this case Individual A has not given you a written notice stating that had he sold the Property, the supply would not have been a taxable supply and you are unable to obtain such a notice including the reasons the supply would not have been a taxable supply. Furthermore, you believe on the basis of reasonable information available to you that the sale of the Property would not have been a taxable supply if Individual A had made it.

Therefore, in addition, your supply of the Property does not constitute a taxable supply by virtue of subsection 105-5(3).