Proposal regarding GST on sale of property by mortgagees

News /
13 March 2012
Proposal regarding GST on sale of property by mortgagees

Following a recent decision of the Federal Court held in Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886 the Federal Government has proposed legislation to ensure that GST could apply to the sale of property by the mortgagee (financier / bank).

This is an exposure draft only; however, this clearly shows the intent of Parliament regarding mortgagee sales.

This measure will impact property owners who default on their debts and have their properties repossessed by the financier (mortgagee).

Proposed date of effect

It is intended that these measures will apply in relation to supplies made on or after the start of the first quarterly tax period (i.e. BAS period) starting on or after Royal Assent of this legislation.

Example from draft explanatory memorandum

Company MCH borrows money from a finance provider, PLB Bank, to purchase a property. A mortgage is registered over the property with PLB Bank as the mortgagee. The terms and conditions of the mortgage deed allow the mortgagee to take control or possession of the property and to exercise the power of sale to recover any outstanding debts owed by MCH.

MCH defaults on the loan repayments and PLB Bank takes possession of the property and subsequently exercises its power of sale as mortgagee and sells the property to a third party. The sale proceeds are applied towards the satisfaction of the outstanding debt owed by MCH to PLB Bank. If MCH had sold the property, the sale would have been a taxable supply for GST purposes. PLB Bank is a controller, as defined in section 9 of the Corporations Act 2001, and is therefore a representative, as defined in section 195-1 of the GST Act, for the purposes of Division 58. When PLB Bank sells the property by exercising its power of sale as mortgagee it is making a supply of a kind covered by paragraph 105-5(1)(a).

However, section 58–95 of the GST Act ensures that Division 105 applies to this arrangement to the exclusion of Division 58. More specifically, Division 105 overrides Division 58 to the extent that the representative PLB Bank makes supplies covered by paragraph 105–5(1)(a).”

In broad terms under Division 105, a creditor is liable for the GST liability on the supply of a debtor’s property where the supply is in satisfaction of a debt owed to the creditor.

Please contact our office should you wish to discuss further or other GST property transactions. You may also follow us on twitter @DKPCo.

The information contained in this news alert is of a general nature and should not be relied upon as a substitute for specific advice.

DKP & Co Chartered Accountants

DKP & Co Chartered Accountants pride themselves on client service to the architecture, property, and building services industry. DKP & Co are a dynamic practice providing a focused range of accounting, project cashflow management, etc.

Learn more

Head Office

DKP & Co Chartered Accountants

Level 6

520 Collins Street

Melbourne, Vic, 3000

Phone: 03 9023 9...