Private ruling: GST and property
Published: July 2014

Ruling: Q1: Would the payment made by several owners of a commercial property (property) directly to a mortgagee be considered as rent, and therefore subject to GST, in circumstances whereby statutory trustees were appointed to sell the property under section 66G of the Conveyancing Act 1919 (Act)? | A1: No, the payment made by several owners of the property directly to a mortgagee would not be considered as rent, and therefore not subject to GST, in circumstances whereby statutory trustees were appointed to sell the property under section 66G of the Act. | Q2: If the answer to question 1 above is yes, in circumstances where the parties have vacated the premises and no longer have the benefit of any occupancy of the premises, but continue to make payments directly to a mortgagee after they have vacated the premises, would these payments be considered as rent, and therefore subject to GST? | A2: Not applicable.

Relevant facts and circumstances: The property is a commercial property (property). The property is subject to an encumbrance by way of mortgage to a bank affecting the entirety. This facility was further secured by each of the owners of the property by way of personal guarantee. The property was jointly owned by several owners (the former owners). The former owners also conducted a business together, which operated from the property. There was a breakdown between the former owners. Some of the former owners continued to operate the business from the property. As part of the proceedings affecting the partnership, an application was made to the Court for relief under section 66G of the Conveyancing Act 1919 (NSW) (Act) for the appointment of statutory trustees (trustees). Section 66G of the Act refers to statutory trusts for the sale (or partition) of the property held in co-ownership as follows: (1) Where any property (other than chattels) is held in co-ownership, the Court may, on the application of any one or more of the co-owners appoint trustees of the property and vest the same in such trustees, subject to incumbrances affecting the entirety, but free from incumbrances affecting any undivided shares, to be held by them on statutory trustee for sale or on the statutory trust for partition. After the trustees had been appointed, the trustees allowed some of the former owners to continue to operate the business from the property, on the basis that they continue to service the mortgage to the bank as they had prior to the trustees' appointment. As part of the sale and marketing program, the property was to be sold as vacant possession by way of public auction. In line with this marketing campaign, some of the former owners were advised to find alternate premises. Some of the former owners ceased trading their business at the property and vacated the premises. The property was passed in and the trustees sought to sell the property by way of private treaty. Notwithstanding that some of the former owners had vacated the premises, they continued to remit funds directly to the bank in satisfaction of the mortgage facility for which they were the guarantors. The trustees have not conducted or traded on the business at the property. The trustees have not received any funds since their appointment and have not made any payment to the bank. The trustees were registered for goods and services tax (GST) several months later after some of the former owners had vacated 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. Division 58

Reasons for decision: Summary: GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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. (* denotes a defined term in section 195-1 of the GST Act) In order for the first requirement of section 9-5 of the GST Act to be met ('you make a supply for consideration') the following three conditions must be satisfied: • there must be a supply; • there must be consideration; • the supply must be made for consideration (in other words, there must be a sufficient nexus between the supply and consideration. In discussing the requirement for a sufficient nexus to exist between the actual supply and the consideration, paragraph 180 of GSTR 2006/9 states: In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration; those rulings take the view that: • the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective; • regard needs to be had to the true character of the transaction; and • an arrangement between the parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. Applying the above to the present case, there cannot have been a taxable supply of the allowance of some of the former owners to use the property from the trustees because the following elements of a taxable supply are not present: • the trustees received no consideration for allowing some of the former owners to continue to use the property while it was being prepared for sale. Some of the former owners are simply continuing repayments of their mortgage to mortgagee, as they were required to, until the property sells. This means there is no additional consideration or 'rent' being provided for any lease; • the trustees, in their role as statutory trustee, were merely tasked with selling the property. They were not conducting an enterprise which would involve receiving rent; • the trustees were not registered for GST several months after some of the former owners had vacated the property; and • there was no nexus between the continuing mortgage repayments being made by some of the former owners to the mortgagee and the allowance by the trustees of them to continue using the premises until vacant possession was required. This is evidenced by the fact that some of the former owners continued to make regular mortgage repayments to the mortgagee after they had vacated the premises. No payments at all were made by some of the former owners to the trustees. Paragraphs 222 and 223 of GSTR 2006/9 (Supplies) refer to Proposition 16: the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply . Relevantly, they state: 222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of the transaction for GST purposes. 223. Australian Courts have held that an arrangement between the parties will be characterised not merely by the description the parties give to the arrangement, but by looking at the transactions entered into and the circumstances in which they are made. This was made clear by McTiernan J in Radaich v Smith (1959) 101 CLR 209 at 214: … the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by the law and not by the label they choose to put on it. In the present case the reverse applies. The fact that no formalised lease was drawn up between the trustees and some of the former owners evidence the parties intentions that they were not intending to enter into a lease agreement until the property sold. The very essence of a lease arrangement requires that the lessor enjoy exclusive possession of the property. In this case some of the former owners would not have enjoyed such rights while the statutory trustee was taking necessary steps to prepare the property for sale. Rather, the true nature of the arrangement was that the trustee simply allowed some of the former owners to use the property until vacant possession was required, provided they continued to make regular payments against their mortgage to the mortgagee. This is common commercial practice, as it spares the mortgagor and the statutory trustee the need to find tenants and enter formalised leases prior to the sale of encumbered properties.