Did you, entity name as trustee for entity name in your capacity as mortgagee in possession, make a taxable supply under subsection 105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you supplied the property located at property address?
Yes. This ruling applies for the following period : DDMMYYYY to DDMMYYYY The scheme commenced on: DDMMYYYY
Mortgagee You, entity name as trustee for entity name, conduct/ed a property investment enterprise. The sole director and shareholder of entity name is individual name. You applied for and were granted ABN number on DDMMYYYY in respect of your enterprise. During the operation of your enterprise, you did not register for GST. Your ABN was subsequently cancelled on DDMMYYYY You applied for this private ruling on DDMMYYYY Loan Agreement On the DDMMYYYY you (the Lender) entered into a Loan Agreement with entity name ACN (number / ABN number) (the Borrower) to provide them a financial facility in the principal sum of $X (the Loan Agreement). To secure the facility the Borrower agreed to provide the following securities: a) First registered mortgage over the Mortgaged Property. b) General Security Agreement granted by entity name. c) Guarantee & Indemnity granted by individual name. The Mortgaged Property is defined in the Loan Agreement as property address formally known as Lot number on Plan of Subdivision DP number contained in Certificate of Title Folio identifier number (the Property).
In additional to your entitlement to repayment of the debt which included the principal sum, interest etc, special provisions within the Loan Agreement entitled you to a portion of the development profits of the Property. Relevant excerpts from the Loan Agreement have been duplicated below: 15 Special provisions - Development 15.1 Development Profits (a) In addition to any amounts payable under this Agreement, the Borrower must pay to the Lender: (i) the amount of $X (number dollars); or (ii) the amount that represents number % of the Net Profit from the development of the Property, Whichever is the lesser ("the Development Profits"). (b) Development Profits means the profits from the development and sale of the lots making up the Property determined by applying the Australian Accounting Standards.
(c) The Development Profits are to be paid to the Lender from the Surplus Funds from the sale of the lots in the development of the Property on an equal and fair basis as settlements are completed. The Lender shall have absolute and sole discretion of the amount of funds distributed. Surplus Funds means the net sale price of a lot reached by deducting from the gross sale price the agent's commission (if any), legal costs and disbursements of the solicitors acting respectively for the vendor and the Lender and an amount payable in partial repayment of the Debt being an amount calculated by dividing the Debt then due and owing by the number of lots in the development. (d) The Development Profits will be secured by way of first mortgage over the Property and will be paid as a priority and first preference payment from the sale of the lots in the development of the Property before any funds are distributed to third parties unless otherwise agreed in writing by the Lender. (e) The Lender acknowledges and agrees that the Borrower is not required to pay Interest on the Development Profits.
(f) In the event that the Property is sold before the development of the Property occurs, the Borrower will pay to the Lender the amount representing number % of the net profit from the sale of the Property being the gross sale price of the Property fess the costs of the purchase, the Debt, and any cost associated with obtaining and/or maintaining the development site, determined by agreement between the Lender and the Borrower acting reasonably, provided that if agreement cannot be reached within one (1) month after the completion of the sale the net profits are to be determined by an independent certified practising accountant, applying the Australian Accounting Standards, appointed by agreement of the parties and failing agreement appointed by the President, for the time being, of the Law Society of state. Until the net profit is agreed or determined the net sale proceeds are to be held in the trust account of the solicitor acting on the sale of the Property and not disbursed without the written direction of both parties. 15.2 Consents The Lender must, within five (5) business days of a request from the Borrower: (a) consent to all applications;
(b) give all information; (c) grant all approvals; and (d) sign all documents; which are reasonably required to enable all development applications for the Property to be made by the Borrower to the local council, any Government Authority, and any other competent authority. A second mortgage (AR number) was registered over the Property in the name of entity name as a previous mortgage (AQ number) had already been registered over the Property in the name of entity name. The Borrower defaulted in their repayment of the principal and interest due under the second mortgage. Consequently, you obtained an order from the state Supreme Court giving you possession of the Property on DDMMYYYY The Property The Property consists of approximately number hectares of vacant land zoned General Residential R1 and Public Recreational RE1 under the name of plan. Prior to your possession Purchase of the Property
It is your understanding the Borrower conducted a property development enterprise and purchased the Property with the intention to subdivide and sell the subdivided vacant residential lots. In accordance with special condition number of the Loan Agreement, you expected to receive a percentage of the net profits from the sale of either the proposed subdivided lots or if undeveloped from the sale of the undeveloped Property. Development applications A local council application search returned the history of applications lodged prior to your possession of the Property. A number of documents are available to review under application DA number. These documents were considered. Review of the Notice of Determination shows a decision to refuse the development application DA number was made by the local council on DDMMYYYY as the proposed development of residential subdivision failed to meet a number of requirements.
The Notice of Determination dated DDMMYYYY was issued to who you believe was the Borrower's representative - entity name. Entity name is a land and property development consultancy practice. It is also your understanding that individual name of entity name is the Borrower's solicitor. After your possession Registered caveats over the Property You became aware of a number of caveats registered pursuant to section 74F of the Real Property Act 1900 against the Property preventing the sale of the Property: All caveats were registered against the Property after you obtained possession of the Property except for AS number which was registered on DDMMYYYY The Caveats were removed from the Certificate of Title of the Property pursuant to section 74J of the Real Property Act 1900 by serving lapsing notices to the Caveators who did not take the necessary action to extend the caveats. The removal of the caveats allowed you to transfer the Property under the power of sale. You engaged a real estate agent to market the Property for sale. Contract of Sale
On DDMMYYYY, you in the capacity of mortgagee in possession exercising the power of sale pursuant to Mortgage AR number entered into a contract for the sale of the Property with third party (unrelated to the Mortgagor) - entity name (CAN number) for $X The contract of sale provides that the supply is not a taxable supply as the mortgagor was not registered for GST. The contract of sale includes the following Additional Conditions in relation to the GST treatment of the supply: 36 Tax 37 The parties agree that, the Registered Proprietor not being registered for GST purposes and the sale by the second mortgagee exercising its power of sale, is a disposal of a capital asset of the Registered Proprietor on the termination of an enterprise. 38 The Vendor will, promptly following Completion, apply to the ATO for a private ruling that the supply under the Contract is GST free.
39 Should the ATO determine that the Registered Proprietor was required to be registered for GST purposes and that GST is payable in respect to the supply under the Contract, the Purchaser must within 14 days after notice of that ATO decision, pay to the Vendor the amount of the GST and any interest for penalties raised by the ATO. The Vendor will then pay the amount to the ATO and provide the Purchaser with a Tax Invoice. 40 This clause will not merge on completion of the Contract. The contract of sale also includes the following relevant clauses: 44 PAYMENTS AND DOCUMENTATION ON COMPLETION 45 On completion, the vendor will transfer the property to the purchaser in accordance with the form of transfer by a mortgagee under power of sale (Form OITP) 46 The purchaser must pay and deliver on completion: (a) The amount payable to entity name (first mortgagee under mortgage AQ number) the amount due to entity name at the completion date (estimated to be $X) or the amount of the balance of the purchase price should that amount be less than the amount then owing to entity name. 47 DEVELOPMENT APPLICATION
48 The mortgagor/registered proprietor had on the understanding of the vendor, lodged a development application in respect to the property, which development application was rejected as the registered proprietor/mortgagor had not complied with the requirements of the Council. 49 Annexed to this contract are: (a) A draft concept plan for development of the land prepared by entity name for the mortgagor/registered proprietor (drawing number), and (b) An email from individual name of entity name following a pre-DA meeting of DDMMYYYY between that firm and the Council, detailing likely changes to the proposed Plan 45.2 Following completion, the purchaser will promptly lodge a development application with the Council in the form substantially in the form of the plan annexed (as revised in accordance with Council's requirements), will promptly respond to any request for particulars from the Council, wilt pay all necessary fees to the Council and provide all necessary reports to enable the Council to assess and respond to the development application.
45.3 Should the Council reject (including any deemed rejection under the relevant Act the development application, the purchaser will lodge an appeal with the relevant Court. You did not receive a share of development profits as per the Special Provisions contained in the Loan Agreement as the Borrower did not make a profit from the sale of the Property. The Borrower Entity name registered with ASIC on DDMMYYYY under the name entity name. It changed its name to entity name from DDMMYYYY. Its current sole director and shareholder is individual name. He was appointed director as of DDMMYYYY. The Borrower registered for an ABN as of DDMMYYYY and for GST from DDMMYYYY. The Australian Business Register (ABR) shows that the Borrower's ABN and GST registration were cancelled effective from DDMMYYYY. Other The Borrower has not given you written notification of what the GST treatment of the supply of the property would be had the supply been made by the Borrower. Furthermore, you have not been able to contact the Borrower or its director regarding this matter. Documents provided for this ruling You provided a number of documents for this ruling.
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 188-25 A New Tax System (Goods and Services Tax) Act 1999 section 195-1
In this ruling, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Section 9-40 of the GST Act provides that an entity must pay the GST payable on any taxable supply that the entity makes. Under Division 105 of the GST Act, a creditor is liable for GST on supplies of a debtor's property where the supply is in satisfaction of a debt owed to the creditor. Section 105-5 states: (1) 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. (2) It does not matter whether:
(a) you made the supply in the course or furtherance of an * enterprise that you * carry on; or (b) you are * registered, or * required to be registered. (3) However, the supply is not a * taxable supply if: (a) 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 (b) if you cannot obtain such a notice--you believe on the basis of reasonable information that the supplywould not be a taxable supply if the debtor were to make it. In your case, the requirement specified in paragraph 105-5(1)(a) is satisfied because you sold the Property which belonged to the Borrower, pursuant to your power of sale as the mortgagee in possession, to a third entity (a purchaser) towards part satisfaction of the loan that the Borrower owed to you. It now needs to be determined whether paragraph 105-5(1)(b) will also be satisfied - namely, if the Borrower (i.e., the Debtor) had made the supply, whether the supply would have been a taxable supply.
In this case you have not received a written notification from the Borrower stating that the supply would not be a taxable supply if the Borrower were to make it for the purposes of paragraph 105-5(3)(a). 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 with 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. Although the supply is made by you as the mortgagee in possession, the supplier considered below is the Borrower as provided for under Division 105 of the GST Act. The supply of the Property by way of sale was made for consideration and was connected with the indirect tax zone as the Property is located in Australia. Accordingly, we consider paragraphs 9-5(a) and (c) were satisfied.
Further, as the Property comprises of vacant residential land, its sale will not constitute a GST-free or input taxed supply. It remains to be determined whether the supply of the Property was made in the course or furtherance of an enterprise carried on by the Borrower and whether the Borrower was required to be registered for GST. Supply in the course or furtherance of enterprise Paragraph 9-20(1)(b) relevantly defines enterprise to include an activity, or series of activities, done in the form of an adventure or concern in the nature of trade. The meaning of 'enterprise' is considered in 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) and in Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) which provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act.
Paragraph 159 of MT 2006/1 discusses how to determine the extent to which an activity or a series of activities amounts to an 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. Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all the relevant activities in order to determine the existence of an enterprise: 160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.
Consequently, the relevant activities are the activities associated with the purchase of the Property and the activities subsequently undertaken by the Borrower to obtain finance, subdivide the Property, market the proposed lots for sale and the eventual sale of the undeveloped Property. We now consider whether the activities of the Borrower are in the form of an adventure or concern in the nature of trade. In the form of an adventure or concern in the nature of trade 'An adventure or concern in the nature of trade' is not defined in the GST Act. Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade': 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.
The commercial nature of a transaction or scheme is significant in determining whether the activities are done in the form of an adventure or concern in the nature of trade. This is further explained in MT 2006/1: 237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority, said: It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.
In relation to land bought with the intention of resale paragraph 270 of MT 2006/1 specifically provides: Land bought with the intention of resale 270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. From the information you supplied, we consider the Borrower purchased the Property with the intention to subdivide and sell it at a profit or if all else failed to sell the undeveloped Property at a profit and undertook activities to that effect. The following activities undertaken by the Borrower are considered to be business like activities or activities in the conduct of a profit-making undertaking or scheme and therefore an adventure or concern in the nature of trade:
• The Property was purchased with the intention to subdivide and sell for a profit • The Borrower engaged the services of a land and property development consultancy. practice - entity name • The Borrower or their representative lodged a development application for a number Lot Torrens Title Subdivision and associated civil works with the relevant council. • The number of proposed lots suggest the activities undertaken or proposed to be undertaken were of reasonable size and scale. • The Borrower secured finance to fund the subdivision and the amount borrowed was significant. • The Borrower expected that the sale of the proposed subdivided vacant lots would return a profit and agreed to pay you (the Lender) a fixed amount or percentage of the net profits from the sale of the proposed vacant lots or the undeveloped Property in addition to the principal and interest payable in accordance with the Loan Agreement. • The proposed lots were advertised for sale off-the plan as evidenced by the various caveats registered against the Property.
Notably some of the above listed activities occurred after DDMMYYYY when the Borrower's ABN and GST registration was cancelled. The activities undertaken by the Borrower fall within the definition of an enterprise under subsection 9-20(1). Accordingly, we consider paragraph 9-5(b) was satisfied. It remains to be determined if the Borrower was required to be registered for GST. Supply by an entity that is registered or required to be required to be registered Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold (currently $75,000 or $150,000 for non-profit bodies). As the Borrower is not a non-profit body, the registration turnover threshold that applies to them is $75,000. GST turnover Subsection 188-10(1), when read together with paragraph 188-10(3)(b), provides that an entity has a GST turnover that meets the registration turnover threshold if:
a) their current GST turnover is at or above the registration turnover threshold and the Commissioner is not satisfied that their projected GST turnover is below the registration turnover threshold; or b) their projected GST turnover is at or above the registration turnover threshold. As mentioned above, the registration turnover threshold that applies to the Borrower is $75,000. 'Current GST turnover' is defined in subsection 188-15(1) as the sum of the values of all of an entity's supplies made in a particular month and the preceding 11 months other than: a) supplies that are input taxed b) supplies that are not for consideration c) supplies that are not made in connection with an enterprise that the entity carry on. 'Projected GST turnover' is defined in subsection 188-20(1) as the sum of the values of all of an entity's supplies made in a particular month and the following 11 months other than: a) supplies that are input taxed b) supplies that are not for consideration c) supplies that are not made in connection with an enterprise that the entity carry on.
Section 188-25 requires an entity to disregard the following when calculating their projected GST turnover: a) any supply made, or likely to be made, by the entity by way of transfer of ownership of a capital asset of theirs; and b) any supply made, or likely to be made, by the entity solely as a consequence of: (i) ceasing to carry on an enterprise; or (ii) substantially and permanently reducing the size or scale of an enterprise. 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 (GSTR 2001/7 ) explains the meaning of 'capital asset' in the context of section 188-25 in paragraphs 31 to 36 : 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.
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. (a) Where an entity engages in development and sale of properties, that entity would be making the supply in the course or furtherance of a property development enterprise that the entity carries on. (b) In relation to the sale, the Mortgagor would be required to be registered for GST if not already registered.
As noted above the activities undertaken by the Borrower were done in the course or furtherance of an enterprise in the form of an adventure or concern in the nature of trade. The Borrower acquired the Property with the intention to subdivide and sell the subdivided residential lots at a profit in the course of its enterprise. Alternatively, the Borrower intended to sell the undeveloped Property for a profit in the course of its enterprise as contemplated in the Loan Agreement. We consider the Property comprised of the Borrowers 'trading stock'. Therefore, the sale of the Property was not a sale of a capital asset for the purposes of paragraph 188-25(a). It remains to be determined whether the Borrowers supply of the Property was as a consequence of ceasing to carry on their enterprise. Paragraph 38 to 41 and 46 and 47 of GSTR 2001/7 provides guidance on the meaning of 'solely as a consequence' and state: 38. The GST Act does not define the term 'solely as a consequence of'. In the case of Reseck v. FC of T (1975) 133 CLR 45; 75 ATC 4213; (1975) 5 ATR 538
the meaning of 'in consequence of' in the context of the phrase 'in consequence of termination of employment' was examined. His Honour Gibbs J at CLR 51; ATC 4216; ATR 541 interpreted the words to mean that an event follows as an effect or result of some primary event. However, Jacobs J at CLR 56; ATC 4219, ATR 545 expressed a different view that a 'consequence' in this context is not the same as a 'result'. It does not import causation but rather a 'following on'. Both judges dismissed the argument the termination of service had to be the dominant cause of the payment. 39. Although the words 'in consequence' may mean a result (i.e., cause) or a following on, the addition of the word 'solely' in our view requires that in this context there be a causal connection which is exclusive. 40. In Perpetual Trustee Company Ltd v. Commissioner of State Revenue (2000) 44 ATR 273, Hansen J considered the phrase 'solely in consequence' within Exemption 23 of the Stamps Act 1958 (Vic) . After discussing the purpose of the exemption, (that being to provide an exemption from stamp duty in specific cases), Hansen J said at pages 286-287:
'In its common understanding in its present context the word "solely" in conjunction with the words "in consequence of" means that the exemption will apply only if the instruments of transfer were executed in consequence of the change in trustee and in order to vest the real property of the trust in the name of the new trustee and not in consequence of any other factor.' 41. For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise (see example 1 of this Ruling), or the substantial and permanent reduction in size or scale of an enterprise (see example 2 of this Ruling). 46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade.
As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover. 47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise. In this case we do not consider that the disposal of the Property was solely as a consequence of the Borrower ceasing to carry on their enterprise but rather that their enterprise ceased as a consequence of the disposal of the Property. Consequently, the supply of the Property will not be disregarded in working out the Borrower's projected GST turnover under paragraph 188-25(b). Given the sale price of the Property, the Borrowers GST turnover did meet the registration turnover threshold as specified in paragraph 23-5(b) of the GST Act, and they were required to be registered for GST.
Accordingly, we consider paragraphs 9-5(d) was satisfied. The supply of the Property by the Borrower would have been a taxable supply if the Borrower had made the supply. Consequently, you made a taxable supply pursuant to section 105-5 when you supplied the Property in your capacity as mortgagee in possession.