Australia: Greater GST obligations for mortgagees in possession
A Tax Update

Amendments to the GST law now in force have significant consequences for mortgagees dealing with default accounts.

Key points

• If a mortgagee becomes a controller of a company, it must lodge a separate GST return as controller rather than including any GST in the lender's return as has generally been the practice to date.
• Mortgagees should avoid becoming liable to pay GST at all on commercial rents by arranging for collection of rent without becoming a controller or supplier.

Returning GST as a controller

The Tax Laws Amendment (2009 Measures No. 5) Act 2009 commenced on 4 December 2009 and amended the GST rules for representatives of incapacitated entities. Certain key provisions took effect retrospectively from 1 July 2000. The new measures sought to ensure that representatives of incapacitated entities are responsible for the GST consequences that arise during their appointment. However, the amendments may have unexpected consequences for a mortgagee in possession of property of a company.

Prior to these amendments, the GST obligations of a mortgagee were limited to supplies of the mortgagor's property made by the mortgagee in satisfaction of a debt. There was no obligation on the mortgagee to be registered for GST in that capacity, nor was there any obligation for the mortgagee to report to the Tax Office in relation to the mortgagor's GST affairs.

From 4 December 2009, the amendments expanded the definition of 'representative' to include a 'controller' within the meaning of the Corporations Act 2001 (Cth). The explanatory memorandum which accompanied the amending legislation explained the effect of this amendment as follows:

"A consequential amendment will be made to the definition of 'representative' in Division 195 to include a reference to a 'controller'. A controller is a form of external administrator relating to corporations and should therefore be included as a representative for the purposes of the GST Act."

Under the Corporations Act, a 'controller' includes:

• a receiver, or receiver and manager, of property of a corporation
• anyone else who (whether or not as agent for the corporation) is in possession, or has control, of property of the company for the purpose of enforcing a charge or mortgage.

As a result, a mortgagee who becomes a controller of a company is now required to be registered in that capacity if the company is registered or required to be registered. This will be unfamiliar for most mortgagees who, in the past, may have accounted for GST on sales of the debtor's property in their own activity statement.

In addition, the Commissioner of Taxation may direct a representative (including a controller of a company) to report on behalf of an incapacitated entity if the incapacitated entity has failed to lodge a GST return. However, a mortgagee in possession may have the right to object against a direction to lodge GST returns where the mortgagee does not have access to the books and records of the company.

When is a mortgagee liable for GST on rental receipts?

Both before and after the amendments discussed above, a mortgagee who takes possession of premises that are subject to an existing lease must pay any GST on the rental received by the mortgagee.

Instead of taking possession, mortgagees may want to merely direct rent to be paid to the mortgagee rather than attorning the tenant. The mere payment of rent should not impose any GST obligations on the mortgagee as the supply is still being made by the mortgagor and the mortgagor is obliged to pay any GST.

To avoid taking on the obligations of a controller, a mortgagee should ensure that a notice given to an existing lessee specifies that the notice does not create or impose any obligations on the mortgagee in connection with the lease.

For more information, please contact: