Edited version of your private ruling

Authorisation Number: 1012396236583

Ruling

Subject: GST and sale of properties

Question

Who is liable for the GST which has arisen from the sale of Entity A's property, sold by an individual/entity in their capacity as Power of Attorney to act and engage in dealings on behalf of Entity A, such that the benefit from the sale of the property vests with Entity A's secured creditor?

Answer

Entity A is liable for the GST on the sale of its property when sold by an individual/entity in their capacity as Power of Attorney to act and engage in dealings on behalf of Entity A.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· Entity A is registered for the goods and services tax (GST).

· Entity A owned land and a number of properties and has been carrying on an enterprise of property development.

· Entity A is now in liquidation.

· Entity A borrowed money from Entity B.

· X is the sole director of Entity B.

· X was also director of Entity A for a period of time.

· Entity B obtained a mortgage over Entity A's properties as security for the loan.

· The mortgage and charge deeds allow the lender (that is, the mortgagee) to take control or possession of the mortgaged properties and to exercise the power of sale to recover outstanding debt.

Irrevocable Power of Attorney

· Entity A, as Principal, appointed Mr X and Entity B as its Attorneys to act and engage in dealings on behalf of Entity A.

· The instrument authorises the Attorneys to execute the documents specified.

· Other powers of Attorney include the power of Attorney under the mortgage deed and the power of attorney under the charge deed.

· Entity A defaulted on the loan repayments.

· Entity A (mortgagor) has not been served with default notices by the mortgagee, requiring the mortgagor to cure the default.

· A warrant of possession (in favour of the mortgagee) was not issued as a result of the default.

· Sale of properties during the specified period

o During the specified period, Entity A sold a number of properties.

o The contracts for sale state Entity A as the vendor.

o All the properties were mortgaged premises. However, the power of sale was not exercised by virtue of the mortgagee being in possession.

o The Irrevocable Power of Attorney confers upon X the power to sell the properties on behalf of Entity A (the mortgagor and owner of mortgaged properties).

o All documents related to the sale of the properties owned by Entity A, including the sale contracts and transfer forms were signed by X in their capacity as Power of Attorney under the 'Irrevocable Power of Attorney' instrument.

· The transfer documents

o The documents do not show any encumbrances.

o X signed on behalf of Entity A (transferor)

o Authority was under Power of Attorney conferred by the 'Irrevocable Power of Attorney'

· At the time that X exercised their power of attorney under the 'Irrevocable Power of Attorney' to sell the properties, Entity A was neither in receivership nor in liquidation.

· Entity B was not a receiver of Entity A's property. It was not a manager of Entity A because it had no power to manage the affairs of Entity A under the terms of its mortgage. Entity B was not appointed or authorised by any Court to manage the affairs of Entity A.

· X is also the sole director of Entity C which is a secured creditor.

· The money from the sale of the properties was applied in reduction of the debt owing by Entity A to Entity C. The net sale proceeds from the sale of the properties were forwarded and/or the properties were transferred in specie to Entity C's creditors.

Relevant legislative provisions:

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1);

A New Tax System (Goods and Services Tax) Act 1999 section 9-5;

A New Tax System (Goods and Services Tax) Act 1999 section 58-5;

A New Tax System (Goods and Services Tax) Act 1999 section 58-10;

A New Tax System (Goods and Services Tax) Act 1999 section 195-1; and

A New Tax System (Goods and Services Tax) Act 1999 section 105-5.

Reasons for decision

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 made in satisfaction of a debt owed to the creditor.

Section 105-5 of the GST Act provides that a supply made by a creditor in satisfaction of a debt is a taxable supply if:

· an entity supplies the property of the debtor to a third party in satisfaction of a debt that the debtor owes to the entity, and

· the supply, to the third party, would be a taxable supply if the debtor had made the supply.

Division 105 of the GST Act only applies where a creditor supplies the debtor's property to a third party pursuant to the power of sale in or towards the satisfaction of the outstanding debt owed to the creditor.

In this case, X executed the documents for the sale of the properties on behalf of Entity A, under the authority of power of attorney. We have been advised that the power of sale was not exercised by virtue of the mortgagee being in possession. Although Entity A has defaulted in loan repayments, Entity A (mortgagor) has not been served with a default notice by the mortgagee, requiring the mortgagor to remedy the default. There was no warrant of possession (in favour of the mortgagee) issued as a result of the default.

Goods and Services Tax Ruling GSTR 2000/37 states the following in relation to agency and power of attorney.

Universal agents

19. Universal agents have authority to act for the principal in all matters. Usually, a universal agent is appointed by a power of attorney.

X as individual or as sole director of Entity B exercised their power of sale over the properties pursuant to a power of attorney provided for in the 'Irrevocable Power of Attorney'.

The Irrevocable Power of Attorney appoints X and Entity B as Entity A's agents and confers upon them the power to sell the properties on behalf of Entity A.

Division 58 of the GST Act applies to a taxable supply made by a representative of an incapacitated entity to the extent that the making of the supply is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

Pursuant to section 58-5 of the GST Act, a supply, acquisition or importation by a representative, in its capacity as a representative, is taken, for GST purposes, to be a supply, acquisition or importation of the incapacitated entity.

Section 58-10 of the GST Act provides that the representative (and not the incapacitated entity) is liable for or entitled to certain GST consequences that arise from a supply, acquisition or importation or related acts or omissions during the representative's appointment. Effectively, the supply is made by the incapacitated entity but the representative is liable for the GST on the supply.

The term 'incapacitated entity' is defined in section 195-1 of the GST Act to mean:

· an individual who is a bankrupt; or

· an entity that is in liquidation or receivership; or

· an entity that has a representative.

We have been advised that when X sold Entity A's property, Entity A was neither in receivership nor in liquidation at that time.

The term 'representative' is defined in section 195-1 of the GST Act to mean:

(a) a trustee in bankruptcy; or

(b) a *liquidator; or

(c) a receiver; or

(ca) a controller (within the meaning of section 9 of the Corporations Act 2001); or

(d) an administrator appointed to an entity under Division 2 of Part 5.3A of the Corporations Act 2001 ; or

(e) a person appointed, or authorised, under an *Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable; or

(f) an administrator of a deed of company arrangement executed by the entity.

Paragraph (ca) of the definition of a 'representative' includes a 'controller (within the meaning of section 9 of the Corporations Act 2001)'.

Section 9 of the Corporations Act 2001 defines a 'controller' as follows:

 controller, in relation to the property of a corporation, means:

a)  a receiver, or receiver and manager, of that property; or

b)  anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a charge;

 and has the meaning affected by paragraph 434F(b) (which deals with 2 or more persons appointed as controllers).

'Charge' is defined quite broadly in section 9 of the Corporations Act 2001 as:

Charge means a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise.

A mortgagee who takes possession of property of a corporation and sells it pursuant to the power of sale granted under the mortgage deed falls within paragraph (b) of the definition of a 'controller' as 'anyone else who ... is in possession, or has control, of that property for the purpose of enforcing a charge'. The mortgagee in possession of a property of a corporation is a 'representative' and falls within the ambit of Division 58 of the GST Act.

Both the mortgage deed and the company charge deed contain a power of attorney provision, pursuant to which the mortgagor (Entity A) appoints the mortgagee (Entity B) as the attorney of the mortgagor. However, when Entity A defaulted in the loan repayments, the mortgagee did not serve Entity A (mortgagor) with a notice requiring it to cure the default. Also, a warrant of possession (in favour of the mortgagee) was not issued as a result of the default.

As such, the sale of Entity A's property was not made by the mortgagee exercising its power of sale. Rather, X (as director of Entity B or in his individual capacity) exercised their authority under the 'Irrevocable Power of Attorney' to sell Entity A's property. This is also evidenced in the transfer of sale documents.

Under the 'Irrevocable Power of Attorney' instrument, X was appointed to act and engage in dealings on behalf of Entity A. The instrument authorises X to execute the documents specified, including contracts of sale of land and transfers of sale of land under the Real Property Act 1900.

This instrument does not specify that X has been appointed to manage the affairs of Entity A because it is unable to pay all its debts as and when they become due and payable. Therefore, when Entity A's property was sold under authority of the Irrevocable Power of Attorney, X (as director of Entity B or in his individual capacity) was not a 'representative' of Entity A and Entity A was not an incapacitated entity for the purposes of Division 58 of the GST Act. As such, Division 58 of the GST Act does not apply.

As the sale of Entity A's property was not made by X as the mortgagee exercising its power of sale, the sale does not fall for consideration under either Division 58 or Division 105 of the GST Act.

Section 9-5 of the GST Act provides that an entity makes a taxable supply if it makes the supply for consideration; the supply is made in the course or furtherance of an enterprise that it carries on; the supply is connected with Australia; and the entity is 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.

In this case, X exercised the power of sale as agent for Entity A under the Irrevocable Power of Attorney. Entity A is the principal and is the entity that sold the properties. Where the requirements of section 9-5 of the GST Act are satisfied, the sale is a taxable supply.

Pursuant to subsection 7-1(1) of the GST Act, GST is payable on taxable supplies.

Section 9-40 of the GST Act provides that an entity must pay the GST payable on any taxable supply that it makes.

As such, Entity A is liable for the GST on taxable supplies of the properties and must pay the GST payable on any taxable supply that they make on the sale of the properties.

The fact that the net sale proceeds from the sale of the properties were subsequently transferred to third parties by X under separate powers of attorney provided in the loan or other documents or in their other capacities, does not change the conclusion that Entity A is the entity liable for the GST on the sale in the given circumstances.

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