Private ruling: Supply of a residential property in satisfaction of debts
Date of advice: 18 March 2020
Published: May 2020
Date scheme commenced: An entity carries on an enterprise and is registered for Goods and Services Tax (GST).

Ruling: Q1: Is the sale by a creditor of the property situated at xxx a taxable supply as defined in section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: No, the sale of the property situated at xxx is not a taxable supply. The sale is input taxed.

Relevant facts and circumstances: An entity carries on an enterprise and is registered for Goods and Services Tax (GST). Mr & Mrs Y (Residents) acquired the Property numerous years ago. They have occupied the Property as their main residence since then and continue to reside at the Property. The Residents granted the entity a first registered mortgage over the Property (Mortgage). It is understood the mortgage was provided as security for a loan provided by the entity. The Residents defaulted on the Mortgage and the entity took possession of the Property as mortgagee in possession as a result. The entity subsequently entered into a Put and Call Option Agreement (Option Agreement) with another entity (Buyer) for the sale of the Property. The entity and the Buyer are and were at all relevant times registered for GST. The Residential Dwelling is capable of being occupied for residential accommodation and is occupied by the Residents as their main residence. There have been no substantial renovations or repair works undertaken on the Residential Dwelling in the last five years, and the property is zoned as an Emerging Community. The area of land adjacent to the Residential Dwelling consists mainly of naturally timbered areas with areas of lawn and gardens closer to the house. The physical characteristics of the Property and the Residential Dwelling indicate the land surrounding the Residential Dwelling is intended to be used in connection with the Residential Dwelling.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 sections 9-5; 40-6 105-5

Reasons for decision: Detailed Reasoning - Division 105: Division 105 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with supplies made by creditors of property belonging to a debtor where the supply is made in satisfaction of a debt owed to the creditor. Section 105-5 of the GST Act provides that a supply made by a creditor in satisfaction of a debt is a taxable supply if: · an entity supplies the property of the debtor to a third party in satisfaction of a debt that the debtor owes to the entity, and · the supply, to the third party, would be a taxable supply if the debtor had made the supply. | Detailed Reasoning - Taxable supply: Section 9-5 of the GST Act provides that an entity makes a taxable supply if it makes the supply for consideration; in the course or furtherance of an enterprise that it carries on; the supply is connected with the indirect tax zone; and the entity is 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. In this case the supply of the residential property is not considered to be GST-free. Therefore, we need to consider whether the sale is input taxed. | Detailed Reasoning - Input taxed supply: It has been submitted to the ATO that: · the Residents acquired the Property numerous years ago and have occupied the Property as their main residence since then and continue to reside at the Property; · the physical characteristics of the Property and the Residential Dwelling indicate the land surrounding the Residential Dwelling is intended to be used in connection with the Residential Dwelling. According to the information provided what is being sold is a residential property. Further, the residential premises is not considered to be new as: · it has previously been sold as a residential premises; · it has not been the subject of a long-term lease; · it has not been created through substantial renovations within the last five years; · it has not been built, or contain a building that has been built, to replace demolish premises on the same land. Section 40-65 of the GST Act provides that a sale of residential premises is input taxed. Residential premises is described at section 195-1 of the GST Act as land or building that: · is occupied as a residence or for residential accommodation; or · is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. In this case had the debtor sold out the residential premises, the supply would have been input taxed. Therefore, according to the information provided, we are satisfied that the sale of the residential premises in the satisfaction of debts is not a taxable supply. The sale is input taxed.