Australia: GST and mortgagee sales – some hidden dangers

Last Updated: 9 July 2014
Article by Damian O'Connor

Debtor complaints to the Financial Ombudsman Service (and others) about GST

In tough economic times it is very common for creditors to enforce their powers to sell property to try and recoup some of what they are owed. Property transactions can result in somewhere between zero and 1/11th of the sale price going to the Tax Commissioner – for big transactions this GST cost can be a very large number.

The A New Tax System (Goods and Services Tax) Act 1999 (GST Act) says that a mortgagee is directly liable to the Australian Taxation Office for whatever GST would have been payable if the debtor had made the sale themselves.

That all sounds straight forward in theory, but the obvious practical problem for mortgagees, and their professional advisors, is working out what the GST position of the debtor would have been. It should come as no surprise that by the time a mortgagee sale is imminent it is often the case that the romance has well and truly gone out of the relationship and debtors can be hard to locate, let alone eager to talk about tax or pay their own advisors to work out the GST issues for the mortgagee.

The GST Act provides some assistance – mortgagees can potentially rely on a written statement from a debtor about the GST position, or failing that a mortgagee can form their own conclusion about GST based on "reasonable information available to them."

So far so good; however, without any co-operation from the debtor there may not be very much "reasonable information" available on which to base a GST conclusion.

In our experience, the first step should always be to write to the debtor and seek a statement about the GST position that will satisfy the GST Act and the Tax Commissioner, and perhaps indicate to the debtor that the mortgagee will adopt a particular GST position unless the debtor can provide them with "reasonable information" to convince them otherwise.

In a perfect world, debtors would always obtain their own professional advice about the GST outcomes of a property sale, and it may be that the debtor, if they were making the sale themselves, could make elections or other choices that could result in no GST arising at all. These choices would of course be informed by the actual circumstances of the debtor, for example whether they acquired the property pre GST, or under the margin scheme or as a private transaction without claiming input tax credits.

Without this information, mortgagees and their advisors have a very difficult task in reaching a conclusion about how to account for GST to the Tax Commissioner. There is always the temptation to simply treat a transaction as subject to full rate GST to keep the ATO happy, however the bigger the GST charge, the less money available to be offset against the debtor's liability.

This can (and does) focus a debtor's attention once the dust has settled, and it's not unheard of for debtors to complain that mortgagees got the GST treatment wrong and caused a loss to the debtor, irrespective of the mortgagee's best efforts to satisfy the GST legislation.

Dealing with Debtor GST Complaints

We understand that there have been situations where debtors have complained to the Financial Ombudsman Service (FOS) that mortgagees have got the GST treatment wrong, and as a result, the debtor says they should not bear the extra GST cost.

While FOS may not be the best forum to decide the technical questions about the correct GST treatment of a particular transaction, it is still important for mortgagees to make carefully considered submissions to FOS where GST complaints have been made by debtors, to make it as easy as possible for FOS decision makers to arrive at the correct GST outcome. Of course, FOS is not the only forum where debtors may raise GST complaints, and life will be a whole lot easier for mortgagees if these GST issues have already been properly worked through at the transaction time.

Where to from here?

There are very few "off the rack" solutions in the world of tax, however in simple circumstances prudent mortgagees will usually take the following steps to try to minimise the risk of a GST dispute down the track:

  • Search public data such as the Australian Business Register for GST registrations;
  • Look at finance application documents for indications of debtors' activities and clues about GST treatment on acquisition of the property;
  • Write to the debtors seeking a statement from them about the GST position that will satisfy the GST legislation;
  • Tell them that in the absence of any response you may adopt a particular GST treatment; and
  • Encourage the debtor to get their own GST professional advice, for the very good reason that there may be facts that they are aware of or elections or choices they could make that could mean more cash left over from the sale to reduce their liability or be paid out to them.

Just remember that a simple letter does not provide a bullet proof guarantee that GST problems won't arise. Every mortgagee sale that has GST complications will be difficult in its own particular way, and in some cases it may be appropriate to obtain a private ruling from the Tax Commissioner as early in the process as feasible, preferably before any sale is completed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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