Private ruling: GST and sale of property as mortgagee in possession
Date of advice: 8 October 2015
Published: October 2015

Ruling: Q1: Can the margin scheme apply in working out the GST payable on your supply of the Property? | A1: Yes, provided you agree in writing with the purchaser to use the margin scheme, you are entitled to apply the margin scheme to your supply of the Property, subject to making an increasing adjustment pursuant to subsection 75-22(1) of the A New Tax System (Goods and Services Tax) Act 1999 ?

Relevant facts and circumstances: You propose to sell vacant land (the Property) as mortgagee exercising power of sale. The Property originally comprised a xx storey building containing xx residential lots (units), commercial premises and residents' facilities (such as a pool). The Property was refurbished some time ago. These renovations were not substantial. The buildings on the Property were demolished in 20xx. The site is now vacant. It has been landscaped but is fenced off and is not being actively used. The registered owner of the Property has been registered for GST since 20xx. The owner commenced acquiring the residential units and commercial property comprising the Property in 20xx and completed the acquisition of the Property in 20xx. The debtor has not given you a written notice stating that the supply of the Property 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. You have not been able to determine that the supply of the Property would not be a taxable supply if the debtor were to make it. You intend to supply the Property as a taxable supply, and the margin scheme will apply in working out the GST payable on your supply. A put and call option agreement with a possible purchaser is in place. The Contract for Sale attached to the put and call option agreement states "Subject to clause xx below, the Vendor will, to the extent that it is legally entitled to do so, elect to apply the margin scheme to calculate the GST payable on the supply of the Property under or in connection with this Contract". If the option is exercised, then the purchase price is to be $xxxx. Acquisition of the Property Between 20xx and 20xx, the units and common property were acquired. The residential units were acquired by way of input taxed supplies, and no tax invoices were provided by any of the vendors in respect of the supplies of the units. The total value of the residential units acquired was $xxxx. The previous owner did not acquire any of the units as part of a joint venture, or from any associate of theirs, or from a deceased person.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 105-5 | A New Tax System (Goods and Services Tax) Act 1999 section 75-5 | A New Tax System (Goods and Services Tax) Act 1999 section 75-22

Reasons for decision: Summary: Note: 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 Under subsection 105-5(1), you make a taxable supply if: • 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 • had the debtor made the supply, the supply would have been a taxable supply. However, under subsection 105-5(3) the supply is not a taxable supply 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. The debtor has not given you a written notice stating that the supply of the Property 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. Nor have you been able to determine that the supply of the Property would not be a taxable supply if the debtor were to make it. Consequently, you intend to supply the Property as a taxable supply, and apply the margin scheme in working out the GST payable on your supply. ATO Interpretative Decision ATO ID 2001/112 Goods and Services Tax: GST and mortgagee in possession explains that, where the debtor was able to apply the margin scheme in line pursuant to section 75-5, the mortgagee in possession may also choose to apply the margin scheme in respect of the sale. Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by: a. selling a freehold interest in land, or b. selling a stratum unit, or c. granting or selling a long-term lease; if you and the recipient of the supply have agreed in writing that the margin scheme is to apply. However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme. If the supply of land is not ineligible for the margin scheme, the GST on any sale will be calculated as 1/11th of the relevant margin, i.e. 1/11 th of the amount by which the consideration for your supply exceeds the consideration for your acquisition of the interest, unit or lease in question. Eligibility Subsection 75-5(3) lists the circumstances in which you acquire the entire freehold interest, stratum unit or long term lease through a supply that is ineligible for the margin scheme. The Property was constructed in 19xx. It comprised residential lots, commercial premises and residents' facilities. The buildings on the Property were demolished in 20xx. The site is now vacant. It has been landscaped but is fenced off and is not being actively used. The residential components of the building were acquired as input taxed supplies or were acquired from unregistered vendors and, thus, were not taxable supplies. However, at least some of the commercial premises would have been acquired a taxable supply on which the GST was worked out without applying the margin scheme. Paragraph 75-5(3)(a) provides that the debtor's supply is 'ineligible for the margin scheme' in this circumstance. Accordingly, the commercial component is 'ineligible for the margin scheme'. Notwithstanding paragraph 75-5(3)(a) and that the commercial component is deemed ineligible for the margin scheme, you may still be entitled to apply the margin scheme on your lot sales, provided you meet the requirements of subsection 75-22(1), which provides that you have an increasing adjustment if: • you make a taxable supply of real property under the margin scheme, and • an acquisition that you made of part of the interest, unit or lease in question was made through a supply that was ineligible for the margin scheme, and • you were, or are, entitled to an input tax credit for the acquisition. The amount of the increasing adjustment is an amount equal to the previously attributed input tax credit amount for the acquisition. Paragraph 150 of Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) explains that if you acquire adjoining properties, one of which is acquired through a supply that is ineligible for the margin scheme, and you subdivide the properties, the margin scheme can be used for the supply of some of the subdivided lots. Paragraph 151 of GSTR 2006/8 further explains that the margin scheme: • can be applied for the supply of those lots that were derived entirely from land that was acquired through a supply that was eligible for the margin scheme (without the requirement for any increasing adjustment) • can be applied to those lots derived partly from land that was acquired through a supply that was ineligible for the margin scheme as subsection 75-5(2) does not apply, provided that an increasing adjustment to the extent of the ITC entitlement for the acquisition of these lots is recognised, and • cannot be applied for the supply of those lots that were derived entirely from land that was acquired through a supply that was ineligible for the margin scheme as subsection 75-5(2) applies. As the buildings on the Property were demolished in 20xx, the vacant site will have been acquired partly from the residential premises (eligible) component and partly from the commercial premises (ineligible), similar to lots 4-6 in paragraph 152 of GSTR 2006/8. Therefore, as explained in paragraphs 151 and 155 of GSTR 2006/8, the margin scheme can be applied to your supply of the Property. If the margin scheme is applied to your supply of the Property, there will be an increasing adjustment under subsection 75-22(1).