Private ruling: GST and eligibility to apply the margin scheme
Published: April 2014
Ruling period: Not applicable
Date scheme commenced: Not applicable

Ruling: Q1: Are the purchaser and the vendor entitled to use the margin scheme to calculate the goods and services tax (GST) payable on the sale of the property? | A1: Yes, the purchaser and the vendor are entitled to use the margin scheme to calculate the GST payable on the sale of the property. Please refer to the reasons for decision for more details.

Relevant facts and circumstances: • ABC is registered for goods and services tax (GST). • ABC has agreed to purchase a property from XYZ selling the property as mortgagee in possession. • The supply of the property consists of four residential premises and a bare land. The subject of this application for a private ruling is in respect to the calculation of the GST for the bare land and whether the margin scheme is available to its supply. • The mortgagor of the property acquired the bare land from an unregistered vendor. • The solicitors for the unregistered vendor have confirmed that the sale of the property was a one off transaction and not made in the course or furtherance of an enterprise carried on by the vendors who were not registered or required to be registered for GST. • The mortgagor is registered for GST.

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 75-5 | A New Tax System (Goods and Services Tax) Act 1999 - paragraph 75-5(3)(a) | A New Tax System (Goods and Services Tax) Act 1999 - section 105-5 | A New Tax System (Goods and Services Tax) Act 1999 - paragraphs 105-5(1)(a) and 105-5(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 - subsection 105-5(3)

Reasons for decision: Summary: 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 in satisfaction of a debt owed to the creditor. Paragraphs 105-5(1)(a) and (b) of the GST Act provide that a creditor will make a taxable supply if they supply the property of a debtor to a third entity in or towards the satisfaction of a debt owed by the debtor to themselves and had the debtor made the supply, the supply would have been a taxable supply. Furthermore, the creditor is liable for any GST payable on the supply of the debtor's property whether or not the supply is made in the course of the creditor's enterprise or if the creditor is registered or required to be registered for GST as per section 105-20 of the GST Act. The creditor (which could either be a receiver manager, mortgagee in possession or a liquidator) is taken to be standing in the shoes of the debtor when the creditor makes the supply or is acting as an agent for the debtor. However, subsection 105-5(3) of the GST Act provides that the supply is not a taxable supply if: • the debtor has given the entity 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 the entity cannot obtain such a notice - the entity believes on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it. In this case, XYZ is selling the bare land as a mortgagee in possession towards satisfaction of the debt owe by the mortgagor under the mortgage. Therefore, the issue is whether XYZ has reasonable information to form a belief that the supply would not be a taxable supply if the mortgagor were to make it. Under section 9-5 of the GST Act, you will be making a taxable supply if you make the supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; and the supply is connected with Australia; and 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. The supply of the property will be made for consideration and in the course or furtherance of an enterprise and is connected with Australia. The mortgagor of the property is registered for GST. The supply of bare land is not GST-free or input taxed, under the GST legislation. However, the issue that needs to be determined is whether ABC and XYZ as mortgagee in possession are entitled to use the margin scheme to calculate the GST on the sale of the property. The Property and Construction partnership issue Register (Question 15.1.27) explains that if all of the requirements for the application of the margin scheme contained in division 75 of the GST Act are satisfied, the mortgagee in possession (creditor) may apply the margin scheme in respect of the sale of property. Under section 75-5 of the GST Act, you may choose to use the margin scheme to work out the GST payable on the supply if you make a taxable supply of real property by selling a freehold interest in land; or selling stratum unit; or granting or selling a long-term lease. However, the margin scheme does not apply if you acquired the entire freehold interest through a supply that was ineligible for the margin scheme. Therefore, it is necessary to determine whether the mortgagor had acquired the property through a supply that was ineligible for the margin scheme. Paragraph 75-5(3)(a) of the GST Act provides that a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme. Based on the information provided by you, the mortgagor acquired the property from a vendor who was not registered or required to be registered for GST and who did not pay GST on the acquisition of the property. Furthermore, the vendor's solicitors have confirmed that the sale was a one off transaction and not made in the course or furtherance of an enterprise carried on by the vendors. This means that the supply of this property was not a taxable supply to the mortgagor as the supply did not satisfy all of the requirements of section 9-5 of the GST Act and is eligible for the use of the margin scheme. Therefore, the Commissioner agrees that in this case the parties are entitled to use the margin scheme to calculate the GST on the supply of the property.