Edited version of private advice

Authorisation Number: 1051948032921

Date of advice: 23 June 2022

Ruling

Subject: GST - sale of real property by mortgagee in possession

Question

Were you, the ABC entity, in your capacity as mortgagee in possession making a taxable supply under section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) when you sold the property at the specified address in Australia (the Property)?

Answer

No.

This ruling applies for the following period:

1 July YYYY to 30 June YYYY

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

In this ruling the references to you/You, ABC Limited, ABC Ltd, ABC, and mortgagee/Mortgagee refer to the same entity.

You, the ABC entity, are the mortgagee of property described as Registered Volume # Folio # and also known as <property address> (the Property). You took possession of the Property pursuant to the mortgage on DDMMYYYY.

The mortgagor was XYZ Pty Ltd as trustee for T Trust (the T Trust/the Mortgagor/the Debtor).

•         The Mortgagor held an ABN until DDMMYYYY

•         The Mortgagor was registered for GST from DDMMYYYY to DDMMYYYY

•         The Mortgagor's GST registration was cancelled effective from DDMMYYYY

•         The Mortgagor acquired the Property on DDMMYYYY under finance from you, which was secured by a mortgage

•         The corporate trustee, XYZ Pty Ltd, was deregistered from ASIC effective from DDMMYYYY.

According to information provided by the Mortgagor to you at the time of making the loan to purchase the Property, the Mortgagor intended to restore and refurbish the commercial buildings situated on the Property, and then subdivide the Property to include the commercial buildings and new residential premises. The Mortgagor did not proceed with the development.

You provided documentation relevant to the sale of the Property and the surrounding circumstances relating to the Mortgagor. Of note is the zoning of the Property changed from "Community Use" to "Inner Residential" during the period of the Mortgagor's ownership.

You sold the Property pursuant to your power of sale under the mortgage on DDMMYYYY to the purchaser (an unrelated third party) for $x.

Settlement occurred on DDMMYYYY.

You have made the assumption that the T Trust would have made a taxable supply and charged GST on the sale of the Property if it had sold the Property based on the original intentions of T Trust to subdivide and develop the Property, the change in permitted use of the Property, and advice received from the directors of the corporate trustee XYZ Pty Ltd.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 105-5

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Question

Were you, the ABC entity, in your capacity as mortgagee in possession making a taxable supply under section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) when you sold the property at the specified address in Australia (the Property)?

Detailed reasoning

In this reasoning, unless otherwise stated:

•         all legislative references are to the GST Act

•         all legislative terms marked with an asterisk are defined in section 195-1 of the GST Act

•         all reference materials published by the Australian Taxation Office (ATO) referred to in this ruling are available on the ATO website ato.gov.au

Section 9-40 provides that GST is payable on taxable supplies. Division 105 makes a creditor liable for GST on supplies of a debtor's property where the supply is in satisfaction of a debt owed to the creditor. This Division applies to sales made by a mortgagee in possession.

Subsection 105-5(1) provides:

You make a taxable supply if:

(a)  you supply the property of another entity (the debtor) to a third entity in or towards 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.

As per subsection 105-5(2), it does not matter whether you made the supply in the course or furtherance of an enterprise that you carry on, or whether you are registered or required to be registered for GST.

In your case, paragraph 105-5(1)(a) is satisfied because you sold the Property, which belonged to the Mortgagor, pursuant to your power of sale as mortgagee in possession to a third party (the Purchaser).

It now needs to be determined whether paragraph 105-5(1)(b) was satisfied - namely, if the Mortgagor (i.e. the debtor) made the supply, whether the supply would have been a taxable supply. This will now be examined in detail.

Section 9-5 provides that an entity makes a taxable supply if:

(a)  the entity makes the supply for consideration,

(b)  the supply is made in the course or furtherance of an enterprise that the entity carries on,

(c)   the supply is connected to the indirect tax zone (Australia), and

(d)  the entity is 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, had the Mortgagor made the supply,

•         the supply would have been for consideration in the form of the sale price

•         the supply would be connected to Australia as the Property is located in Australia

•         the supply would neither be GST-free nor input taxed as the provisions would not have applied.

Therefore, the requirements listed in paragraphs 9-5(a) and (c) would have been met.

What remains to be considered is, if the Mortgagor had made the sale of the Property, would the sale have been made in the course or furtherance of an enterprise that the Mortgagor carried on, as set out in paragraph 9-5(b), and whether the Mortgagor was required to be registered for GST in relation to the sale.

Section 9-20 provides an enterprise is an activity, or series of activities, done (among other things):

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

The concept of an 'enterprise' is a fundamental GST concept. For example, a supply cannot be a taxable supply unless it is made in the course or furtherance of an enterprise carried on by a supplier. In addition, an entity cannot be registered for GST unless it is either carrying on an enterprise or intends to carry on an enterprise.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number (MT 2006/1) explains when certain activities will amount to an enterprise.Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. Some paragraphs in MT 2006/1 are extracted for your information:

68. ...A trust itself is not a legal person and therefore must be represented by the trustee for the trust...

94. Carrying on an enterprise includes activities done in the commencement or termination of the enterprise. ...

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature...

Trade v. investment assets

258. ...Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

260. Assets can change their character but cannot have a dual character at the same time.

MT 2006/1 further explains at paragraph 160 that all relevant factors need to be weighed up as part of the process of reaching an overall conclusion as to the existence of an enterprise. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Although activities done in the course of terminating an enterprise are still considered to be done in the course of furtherance of that enterprise, any activities done by an entity after their enterprise has ceased will not be in the course or furtherance of that enterprise. It is therefore necessary to determine the point in time when an enterprise ceased.

On these facts, we accept that the Mortgagor was carrying on an enterprise of property development for a period of time starting from when it acquired the Property (DDMMYYYY), because of the intention to subdivide and develop the Property at the time of acquisition. It therefore becomes necessary to determine whether the Mortgagor's enterprise of property development was still continuing at the time you sold the Property to the Purchaser.

Paragraphs 140, 142 and 147 of MT 2006/1 provide guidance on the Commissioner's view of when an enterprise is considered to have terminated:

Termination of an enterprise

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

142. A change in purpose or use of all assets could result in the termination of an enterprise. A change could occur where an asset is no longer used by the entity in the enterprise and is instead used for private purposes.

147. The question of whether the activities are done in terminating the enterprise or at some later point (and do not have a connection with the termination activities) is one of fact and degree depending on the circumstances of each particular case.

We consider the following factors to be relevant:

•         According to information provided by the Mortgagor to you at the time of making the loan to purchase the Property, the Mortgagor intended to restore and refurbish the commercial buildings situated on the Property, and then subdivide the Property to include commercial buildings and new residential premises.

However, the Mortgagor did not proceed with the development. That is, the Mortgagor did not follow through on its intention to subdivide the Property and held the Property in the same state as it had been acquired.

•         The Mortgagor's cancellation of its ABN and GST registration in MMYYYY would mean that the Mortgagor had ceased any enterprise activities from that date.

•         The fact that the Property was not sold for nearly # years following the cancellation of the Mortgagor's ABN and GST registration is also consistent that the Property was not being used for a profit-making purpose and no enterprise was being carried on with respect to the Property.

•         Further, the corporate trustee (XYZ Pty Ltd) was deregistered as a company on DDMMYYYY, and you are not aware of whether the T Trust had a new trustee appointed and was undertaking operations. Accordingly, based on the information you provided there would be no trustee in existence for the T Trust from DDMMYYYY.

In weighing up the above factors we determine the activities carried on by the Mortgagor if any in relation to the sale of the Property could not amount to an enterprise for GST purposes at least from the date of the Mortgagor's cancellation of its ABN and GST registration in YYYY. We consider that the nature of the Property changed from a revenue asset to a capital asset upon cancelling their ABN and GST registration when they ceased carrying on any activities in relation to the subdivision of the Property. Although the Mortgagor acquired the Property for a profit-making purpose, the profit-making purpose related to subdividing the land and dealing with the subdivided lots - not selling the Property as-is in the same state it acquired it. Their mere holding of the Property for extended periods of time and eventually disposing of it in these circumstances would not be in the course or furtherance of the Mortgagor's enterprise. In addition to this, we note an enterprise could not be carried on without a trustee for the T Trust post deregistration from ASIC of the corporate trustee XYZ Pty Ltd since MMYYYY.

Consequently, we conclude that the Mortgagor was not carrying on an enterprise under section 9-20 at the time the Property was sold. Therefore paragraph 9-5(b) is not satisfied.

For completeness, we will also examine the requirement to be registered for GST under paragraph 9-5(d). Section 23-5 provides that you are required to be registered for GST if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold.

As stated above, we consider the Mortgagor was not carrying on an enterprise from the time they cancelled their ABN and registration in MMYYYY, and therefore the Mortgagor was not required to be registered for GST at the time of the sale. Consequently, we consider paragraph 9-5(d) is not satisfied.

Accordingly, the requirement specified in paragraph 105-5(1)(b) was not satisfied. It is therefore not necessary to examine the other elements of section 105-5. Accordingly, you, The Trustee for T Trust, in your capacity as mortgagee in possession were not making a taxable supply under section 105-5 when you sold the Property at the specified address.

Additional Information

You should note the provisions of Division 142.

Guidelines in relation to Division 142 are available on Goods and Services Tax Ruling 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999.