Australia: Another GST 'band aid' for lenders

On Tuesday 14 February 2012, the Government released draft legislation aimed at resolving a conflict between two competing divisions of the GST law. If passed, the draft legislation will give legislative support to the administrative position recently adopted by the Tax Office concerning the GST reporting obligations of mortgagees in possession of company owned property.

Background

On 4 December 2009, the GST rules for representatives of incapacitated entities were amended to ensure that representatives of incapacitated entities would be responsible for the GST consequences arising during their appointment. Those 2009 amendments brought about unexpected consequences for a mortgagee in possession of company owned property. Concern about the potential impact of these earlier amendments on mortgagees was initially flagged in a Gadens Lawyers Tax Update in March 2010.

Prior to the 2009 amendments, the GST obligations of a mortgagee were limited to supplies of the mortgagor's property by the mortgagee in satisfaction of a debt. There was no obligation on the mortgagee to register 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. However, following the amendments made on 4 December 2009, the definition of 'representative' was expanded to include a 'controller' within the meaning of the Corporations Act 2001 (Cth), which may include a mortgagee in possession of company owned property. This meant mortgagees in possession were potentially required to register and report for GST in a similar manner to receivers and liquidators.

Draft legislation

The draft legislation released by Treasury earlier this week seeks to ensure that mortgagee sales are governed by Division 105 (supplies in satisfaction of debts) rather than Division 58 (representatives of incapacitated entities). This allows consistent treatment of mortgagee in possession sales for both corporate and non-corporate debtors, and ensures that mortgagees are not required to register in relation to each new mortgagee sale file. GST on mortgagee sales should be reported in the lender's usual business activity statement.

The key amendment proposes to insert a new section 58-95 in Division 58 of the GST Act as follows:

1. is a mortgagee in possession of the entity's property; and
2. is not a representative of the entity for any other reason; the representative need not register under section 58-20 if it will supply that property in or towards the satisfaction of a debt owed to it by the entity.

While the heading for draft section 58-95 indicates that the provision should have general application, the body of the draft section excludes the operation of Division 58 to the extent there is a supply covered by the mortgagee in possession rules.

There may be adverse implications where a mortgagee in possession incurs costs on behalf of the debtor. For example, a mortgagee may incur construction costs completing a property development. Division 105 does not entitle a mortgagee to input tax credits for things it acquires in its capacity as agent of the mortgagor, rather the provisions in Division 105 merely impose a liability on the mortgagee for sales made by the mortgagee while in possession of the debtor's property. This mismatch means a lender may be liable for GST on mortgagee sales while the (potentially insolvent) debtor retains the entitlement to input tax credits for costs incurred by the mortgagee on the debtor's behalf.

Of course this begs the bigger question about whether the law should be amended so that mortgagees are not personally liable for GST on the sale of a debtor's property.

The closing date for submissions in relation to the draft legislation is Tuesday, 13 March 2012.

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.