Private ruling: GST and a sale of a property by a mortgagee in possession
Published: November 2011

Ruling: Q1: Is the sale of a property by An Australian entity (you) as a mortgagee in possession (you), a taxable supply? | A1: No, your sale of the property as a mortgagee in possession is not a taxable supply and therefore not subject to goods and services tax (GST)

Relevant facts and circumstances: An Australian entity ('debtor') purchased a property in Australia in September 20XX. The debtor is registered for GST. The area of the property is 2.85 hectares of land of an irregular shape. The property includes an aged timber dwelling and galvanised iron sheds. The current zoning of the property is Zone 4(a) Industrial under Local Environment plan. However, the structure on the property pre dates the Local Environment Plan and as a result has existing use rights. Accordingly, the continued use of the dwelling for residential premises is allowed. There are a number of dwellings located in the same area that benefit from the existing use right and are occupied as residential dwellings. The dwelling and vacant land was leased to a tenant as residential premises up until approximately 6 months ago. The dwelling has kitchen facilities, electricity and a telephone connection. The dwelling contains facilities for sleeping, laundering, bathing and food preparation. The property was subject to finance. The receiver has been appointed in respect of the assets of the debtor. You are a charge holder for the property and the receiver is selling the property on behalf of you. The proposed purchaser is an individual who plans to occupy the dwelling as a residence. The proposed purchaser advises that the entire lot will be used for residential purposes and plans to apply for the first home owners grant. While the house is considered to be in a rundown condition, based on the previous use as a rental property and based on advice from the real estate agent involved in the sale, you have been advised that the dwelling is capable of being occupied as a residence as it is considered to be fit for human habitation. You are selling the property as a mortgagee in possession. The debtor acquired the property as a taxable supply. The margin scheme was not applied on the purchase of the property. However you are unable to acquire a copy of the sale of an agreement or any other information from the debtor in relation to the property. The existing cottage was on the property when the debtor purchased the property. There have been no additions, modifications, alterations or destruction of any items since the acquisition of the property by the debtor or during the ownership of the debtor. The debtor was planning to develop this property and a neighbouring property. However the actual development did not proceed. The property is listed for sale through a real estate agent. The property is advertised by the real estate agent as a sale of residential land. The advertisement describes the property as large industrial land. The debtor has not provided you with a written notice relating to the nature of the supply for GST purposes. There is no fence around the portion of the property where the house is located and the remainder of the property is vacant land. There is only a boundary fence around the property.

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 9-40 | A New Tax System (Goods and Services Tax) Act 1999 Division 58 | A New Tax System (Goods and Services Tax) Act 1999 Section 105-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 Reason for decisions | Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (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. Subsection 105-5(1) of the GST Act 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. | (* denotes a term defined in section 195-1 of the GST Act) Subsection 105-5(3) of the GST Act further states: | (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 supply would not be a taxable supply if the debtor were to make it. | Based on the information provided, you are the mortgagee in possession of a property. You are selling the property to a third party in satisfaction of a debt that the debtor owes to you. Furthermore, you advised that the debtor has not given you a written notice stating that the sale of the property would not be a taxable supply if the debtor were to sell it. | We now need to consider if you have reasonable information to form a belief that the supply would not be a taxable supply if the debtor were to make it, as outlined in paragraph 105-5(3)(b) of the GST Act. | A supply would be a taxable supply if all of the requirements listed in section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act states: | You make a taxable supply if: | (a) you make the supply for *consideration; and | (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and | (c) the supply is *connected with Australia; and | (d) you are *registered, or *required to be registered. | However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. | We need to consider whether the sale of the property would have met all of the requirements listed in section 9-5 of the GST Act if it was the debtor who was making the sale. Based on the information provided, the debtor satisfies the requirements of paragraphs 9-5(a) to | 9-5(d) of the GST Act as: | (a) the sale of the property is for consideration; and | (b) the supply would have been made in the course or furtherance of an enterprise (business) that debtor carries on; and | (c) the supply is connected with Australia as the property is situated in Australia and | (d) the debtor is registered for GST. | However, the sale of the property is not a taxable supply to the extent that it is GST-free or input taxed. | There are no provisions of the GST Act under which the sale of the property by the debtor would have been GST-free. Therefore, what remains to be determined is whether the sale of the property by the debtor would have been input taxed. | Input taxed | Division 40 of the GST Act covers supplies, including the transfer of land, that are input taxed and are therefore not taxable supplies. If a supply is input taxed, then no GST is payable on the supply and there is no entitlement to GST credits for acquisitions that relate to making the supply. | Under section 40-35 of the GST Act, a supply of residential premises, other than commercial residential premises (such as hotels, motels and boarding houses), by way of lease, hire or licence is an input taxed supply. Supply of residential premises | Subsection 40-65 (1) of the GST Act provides that a sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation. | Further, subsection 40-65(2) of the GST Act provides that the sale of real property is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998. | 'Residential premises' is defined in section 195-1 of the GST Act as land or a building that: (a) is occupied as a residence or for residential accommodation, or | (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. | Paragraph19 of Goods and Services Tax Ruling GSTR 2000/20, provides that the physical characteristics of the premises determine whether or not such premises are to be used predominantly for residential accommodation. Paragraph 26 of GSTR 2000/20 provides that to be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term. | Goods and Services Tax Ruling GSTR 2000/20: commercial residential premises (GSTR 2000/20) at paragraph 19 states: | 19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation. | Further, paragraph 26 of GSTR 2000/20 provides that the physical characteristics common to residential premises that provide accommodation are: | (i) The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living. | (ii) The premises may be in any form, including detached buildings, semidetached buildings, strata-titled apartments, single rooms or suites of rooms within larger premisesWe now need to consider if the property has the physical characteristics common to residential premises. | Based on the facts provided, the property containing the residential house is clearly residential premises to be used predominantly for residential accommodation. The property has the physical characteristics of a house which provides the occupants with sleeping accommodation and the basic facilities for day to day living and the property containing the residential house is clearly residential premises to be used predominantly for residential accommodation and is therefore considered to be residential premises under subsection 40-65(1) of the GST Act. Furthermore, paragraph 36 of Goods and Services Tax Ruling GSTR 2000/20 states that: | Zoning | 36. For premises to be residential, it must be legal for them to be used for accommodation. As the concepts of 'residential' are given a broad treatment under GST, it is only necessary that the land on which premises stand is zoned by the Council or Shire in a way that contemplates human habitation or accommodation, even if only for short term occupancy. A certain zoning, or a change of zoning cannot, by itself, alter the character of premises. | You advised us that the current zoning of the property is zone 4(a) Industrial under the Local Environment plan. However, the structure on the land pre dates the Local Environment Plan and as a result has existing use rights. As a result, the continued use of the dwelling for residential premises is allowed. The dwelling on the land was occupied by a tenant as residential premises up until approximately 6 months ago. Therefore, we consider that the change of zoning does not alter the character of your property as residential premises. | However, subsection 40-65(2) of the GST Act states that a sale of residential premises is not input taxed to the extent that the premises are: (a) commercial residential premises, or | (b) new residential premises other than those used for residential accommodation before 2 December 1998. | Commercial residential premises | 160. commercial residential premises means: | (a) a hotel, motel, inn, hostel or boarding house; or | (b) premises used to provide accommodation in connection with a school; or | (c) a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire; or | (d) a ship that is mainly used for *entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport; or | (da) a marina at which one of more of the berths are occupied, or are to be occupied, by ships used as residences; or | (e) a caravan park or a camping ground; or | (f) anything similar to residential premises described in paragraphs (a) to (e). | However it does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school. | Based on the facts provided, the property does not fall into any of the categories mentioned above and therefore, is not commercial residential premises under the GST Act. New residential premises | Subsection 40-75(1) of the GST Act explains when residential premises are new residential premises. New residential premises are residential premises that: | · have not previously been sold as residential premises and have not previously been the subject of a long-term lease, or | · have been created through substantial renovations of a building, or | · have been built, or contain a building that has been built, to replace demolished premises on the same land. | Based on the facts provided, the debtor purchased the property as a taxable supply in 2007 and therefore we consider that the premises have not previously been sold as residential premises. However, ATO record shows that the premises on the property were leased to an associate since 2006. Furthermore, the residential properly has not been renovated, repaired or modified in any substantial way. Therefore, the residential property does not satisfy the other requirements in subsection 40-75(1) of the GST Act. Hence, the property is not new residential premises under subsection 40-75(1) of the GST Act. | Consequently, the property satisfies all the requirements of residential premises under the GST Act and therefore, the sale of the property is input taxed under subsection 40-65(1) of the GST Act. | As such, the sale of the property by the debtor would have been an input taxed supply under section 40-65 of the GST Act. Accordingly, the sale of the property by you as mortgagee in possession is not a taxable supply and is not subject to GST.

Reasons for decision: Summary: Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (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. Subsection 105-5(1) of the GST Act 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. (* denotes a term defined in section 195-1 of the GST Act) Subsection 105-5(3) of the GST Act further states: (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 supply would not be a taxable supply if the debtor were to make it. Based on the information provided, you are the mortgagee in possession of a property. You are selling the property to a third party in satisfaction of a debt that the debtor owes to you. Furthermore, you advised that the debtor has not given you a written notice stating that the sale of the property would not be a taxable supply if the debtor were to sell it. We now need to consider if you have reasonable information to form a belief that the supply would not be a taxable supply if the debtor were to make it, as outlined in paragraph 105-5(3)(b) of the GST Act. A supply would be a taxable supply if all of the requirements listed in section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. We need to consider whether the sale of the property would have met all of the requirements listed in section 9-5 of the GST Act if it was the debtor who was making the sale. Based on the information provided, the debtor satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as: (a) the sale of the property is for consideration; and (b) the supply would have been made in the course or furtherance of an enterprise (business) that debtor carries on; and (c) the supply is connected with Australia as the property is situated in Australia and (d) the debtor is registered for GST. However, the sale of the property is not a taxable supply to the extent that it is GST-free or input taxed. There are no provisions of the GST Act under which the sale of the property by the debtor would have been GST-free. Therefore, what remains to be determined is whether the sale of the property by the debtor would have been input taxed. | Detailed Reasoning - Input taxed: Division 40 of the GST Act covers supplies, including the transfer of land, that are input taxed and are therefore not taxable supplies. If a supply is input taxed, then no GST is payable on the supply and there is no entitlement to GST credits for acquisitions that relate to making the supply. Under section 40-35 of the GST Act, a supply of residential premises, other than commercial residential premises (such as hotels, motels and boarding houses), by way of lease, hire or licence is an input taxed supply. | Detailed Reasoning - Supply of residential premises: Subsection 40-65 (1) of the GST Act provides that a sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation. Further, subsection 40-65(2) of the GST Act provides that the sale of real property is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998. 'Residential premises' is defined in section 195-1 of the GST Act as land or a building that: (a) is occupied as a residence or for residential accommodation, or (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. Paragraph19 of Goods and Services Tax Ruling GSTR 2000/20, provides that the physical characteristics of the premises determine whether or not such premises are to be used predominantly for residential accommodation. Paragraph 26 of GSTR 2000/20 provides that to be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term. Goods and Services Tax Ruling GSTR 2000/20: commercial residential premises (GSTR 2000/20) at paragraph 19 states: 19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation. Further, paragraph 26 of GSTR 2000/20 provides that the physical characteristics common to residential premises that provide accommodation are: (i) The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living. (ii) The premises may be in any form, including detached buildings, semidetached buildings, strata-titled apartments, single rooms or suites of rooms within larger premisesWe now need to consider if the property has the physical characteristics common to residential premises. Based on the facts provided, the property containing the residential house is clearly residential premises to be used predominantly for residential accommodation. The property has the physical characteristics of a house which provides the occupants with sleeping accommodation and the basic facilities for day to day living and the property containing the residential house is clearly residential premises to be used predominantly for residential accommodation and is therefore considered to be residential premises under subsection 40-65(1) of the GST Act. Furthermore, paragraph 36 of Goods and Services Tax Ruling GSTR 2000/20 states that: | Detailed Reasoning - Zoning: 36. For premises to be residential, it must be legal for them to be used for accommodation. As the concepts of 'residential' are given a broad treatment under GST, it is only necessary that the land on which premises stand is zoned by the Council or Shire in a way that contemplates human habitation or accommodation, even if only for short term occupancy. A certain zoning, or a change of zoning cannot, by itself, alter the character of premises. You advised us that the current zoning of the property is zone 4(a) Industrial under the Local Environment plan. However, the structure on the land pre dates the Local Environment Plan and as a result has existing use rights. As a result, the continued use of the dwelling for residential premises is allowed. The dwelling on the land was occupied by a tenant as residential premises up until approximately 6 months ago. Therefore, we consider that the change of zoning does not alter the character of your property as residential premises. However, subsection 40-65(2) of the GST Act states that a sale of residential premises is not input taxed to the extent that the premises are: (a) commercial residential premises, or (b) new residential premises other than those used for residential accommodation before 2 December 1998. | Detailed Reasoning - Commercial residential premises: 160. commercial residential premises means: (a) a hotel, motel, inn, hostel or boarding house; or (b) premises used to provide accommodation in connection with a school; or (c) a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire; or (d) a ship that is mainly used for *entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport; or (da) a marina at which one of more of the berths are occupied, or are to be occupied, by ships used as residences; or (e) a caravan park or a camping ground; or (f) anything similar to residential premises described in paragraphs (a) to (e). However it does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school. Based on the facts provided, the property does not fall into any of the categories mentioned above and therefore, is not commercial residential premises under the GST Act. New residential premises Subsection 40-75(1) of the GST Act explains when residential premises are new residential premises. New residential premises are residential premises that: · have not previously been sold as residential premises and have not previously been the subject of a long-term lease, or · have been created through substantial renovations of a building, or · have been built, or contain a building that has been built, to replace demolished premises on the same land. Based on the facts provided, the debtor purchased the property as a taxable supply in 2007 and therefore we consider that the premises have not previously been sold as residential premises. However, ATO record shows that the premises on the property were leased to an associate since 2006. Furthermore, the residential properly has not been renovated, repaired or modified in any substantial way. Therefore, the residential property does not satisfy the other requirements in subsection 40-75(1) of the GST Act. Hence, the property is not new residential premises under subsection 40-75(1) of the GST Act. Consequently, the property satisfies all the requirements of residential premises under the GST Act and therefore, the sale of the property is input taxed under subsection 40-65(1) of the GST Act. As such, the sale of the property by the debtor would have been an input taxed supply under section 40-65 of the GST Act. Accordingly, the sale of the property by you as mortgagee in possession is not a taxable supply and is not subject to GST.

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