GST liability on asset sales by mortgagees: Treasury review completed

 GST, Insolvency practices, Tax debts, Tax liabilities, Taxation Issues  Comments Off on GST liability on asset sales by mortgagees: Treasury review completed
Feb 172012

A draft of  legislation to clarify how the GST Act operates where a mortgagee in possession sells the property of a corporation has been issued for comment .

This exposure draft, issued on 14 February 2012,  follows a consultation paper issued on 7 June 2011.  The Treasury says that: “The exposure draft material has been developed taking into account comments made by stakeholders.”  

What those comments and views were will be available for public viewing on the Treasury website soon. It is Treasury practice to publish submissions on the consultation paper after the legislation has been introduced into the Parliament.

 The Treasury says that “The exposure draft legislation seeks to clarify the GST law for entities in the mortgage lending sector so that representatives of incapacitated entities will no longer need to differentiate between different provisions of the GST law and will be able to report and account under a single registration.”

The Treasury has invited interested parties to comment on the latest exposure draft.  Closing date for submissions: Tuesday, 13 March 2012. Address written submissions to:
The General Manager
Indirect Tax Division
The Treasury
Langton Crescent

Copies of the Exposure Draft, the Explanatory Memorandum and the original June 2011 Consultation Paper are available HERE.

My own submission to the June 2011 consultation paper was as follows:

“I make this brief submission in response to your Consultation Paper of 7 June 2011, in which it is proposed that section 195‑1 of A New Tax System (Goods and Services Tax) Act 2000 (the GST Act)  be amended to expressly provide that Division 105 operate to the exclusion of Division 58 where a mortgagee in possession or control sells the property of a corporation.  You have also asked a much broader question, which is “Is there an alternative way to better achieve the Government’s policy objective of a representative of an incapacitated entity being liable for GST for supplies of property in their possession or control belonging to a corporation?”
In my opinion:
  • Division 105 of the GST Act should not be amended as is proposed.
  • Where a mortgagee takes possession of most of the assets of a corporation, the GST outcome should be the same regardless of the mechanism the mortgagee employs to exercise its rights of repossession and sale.
ATO was just resolving a conflict
 The proposal in the Consultation Paper seems to be guided and influenced by ATO Interpretive Decision 2010/224.  However, that decision by the ATO does not seem to give much consideration to the tax and equity issues involved.  Rather, it just seems to resolve the conflict by applying “the accepted principle of statutory interpretation (which) is that a general provision would give way to the more specific provision where there is conflict between the provisions”. 
Not just a tax issue
There is a good reason why the term ‘controller’ in the Corporations Act 2001 includes a mortgagee who takes possession or control of a corporation’s property in the event of a default by the mortgagor.  Its arises out of abuses of corporate insolvency accountability principles that used to occur prior to 1993.  Back then, to deprive the ATO of its right to priority payment of outstanding group tax, and to avoid the reporting and compliance duties imposed under company law, banks and other mortgagees decided to use the “agent for the mortgagee in possession” option.  Amendments arising out of the ALRC’s 1988 General Insolvency Inquiry took the attractive advantages out of this option.
Even though the “agent for mortgagee in possession” and “mortgagee in possession” mechanisms are now caught by the Corporations Act, I believe we ought to carefully consider what influence the proposed change to Division 105 of the GST Act may have on the choices that mortgagees make when taking possession of a company’s assets.  (I refer here to those who have charges over most of a company’s assets.)  No doubt, if there are tax advantages or cost advantages in them, these alternative mechanisms will become popular again.  In which case we ought to consider whether this development might be to the detriment of accountability to employees, other creditors and the public. 
Division 58
It appears to me that Division 58 was drafted as it was because there would have seemed to be no logical or perceptible reason why the GST outcome of a mortgagee taking possession of a company’s assets should be determined by whether they appointed someone called a “receiver” or someone called an “agent for the mortgage”.  Personally, although I have read lots of relevant material I still cannot see why the GST outcomes should be different.  However, I can see a case for applying a provision such as Division 105 where a financier takes possession of an asset or two under right given in chattel mortgages or the like.
 Division 105
If Section 105.5 of the GST Act was intended to apply in a situation where a mortgagee takes possession of most of the assets of a company, I find this hard to see in its narrow wording.  It seems to apply to a very specific situation.  In my view Treasury should focus in this review on uncovering the meaning of Division 105 of the GST Act and defining what situation – other than those addressed by Division 58 of the GST Act – that Division 105 is trying to address, or should address.”
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Unauthorised amendment of receiver’s BAS gets through ATO

 BAS, GST, Insolvency practices, Returns, Taxation Issues  Comments Off on Unauthorised amendment of receiver’s BAS gets through ATO
Jul 222011

The Australian Taxation Office has been asked to explain how it is possible for a BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended  by another entity without authorisation. In the actual case that gave rise to the question, a GST refund of approximately $650,000 was paid out to the receivers as a result of the unauthorised amendment. The case concerned sale of  real property by the receivers.

The Tax Institute brought this matter to the ATO’s attention in March 2011  at a meeting of one of the ATO’s community consultation forums, the GST Sub-committee of the National Tax Liaison Group.

Minutes of the Meeting, recently published on the ATO website, are reproduced in full below.  It appears that changes to ATO procedures may have already been made.


GST Minutes, March 2011

Agenda item 19 – Amendments of BAS lodged by representatives of an incapacitated entity.  Issue 13.40 raised by the Tax Institute.

The Taxation Institute requests an explanation as to how it is possible for BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended by another entity. Are there any checks in the BAS lodgment system for these unauthorised amendments to be stopped?

The facts relevant to this issue are that two individuals (partners in an accounting firm) were appointed as receivers and managers to sell certain new residential premises owned by a property developer that had defaulted on its repayments to a bank. The receivers had been appointed by the bank.

At the time of lodging the BAS as representatives of the incapacitated entity, the receivers were not satisfied on the basis of the information made available that they could pay GST under the margin scheme and instead paid GST under the basic rules, in respect of all sales of property. The sales proceeds were all paid to the bank.

After their appointment as receivers concluded, the property developer amended the BAS lodged by the receivers (through the business or tax agent portal). A refund of approximately $650,000 was processed without the ATO apparently doing any verification or other analysis (including as to section105-65 of Schedule 1 to the TAA). That refund was paid into the bank account of the receivers and managers (as this was still current with the ATO). This was the first time the receivers became aware that their BAS had been amended.

The matter now involves an ATO investigation of various issues, including the margin scheme valuation. The only issue for the purpose of this request is whether the ATO has any checks in its systems for such unauthorised amendments.

ATO response

Representatives of insolvent or incapacitated entities must be registered, as identified in section 58-20 of the GST Act. The ATO’s practice is to register representatives under a separate Client Account Centre (CAC), but under the same ABN as the incapacitated entity. This enables transactions attributable to the period of receivership/ administration to be recorded separately to those undertaken by the entity prior to and post the period of receivership/ administration.

Authorised contact persons, as nominated by the representatives, are listed against the separate role for the representative. Although the CAC appears on the account of the incapacitated entity, the representative is effectively treated as a separate entity. As a result, only the authorised person is allowed to lodge GST returns and amendments and make changes affecting the representative’s CAC.

Accordingly, a GST return lodged by a representative of an incapacitated entity should not be amended by a person associated with the incapacitated entity itself where that person is not authorised by the representative.

However, it is possible for someone, even where not authorised, to lodge a GST return or amendment. This could be done, for example, in paper form or through the business portal. Where someone has access to the portal in respect of the relevant ABN, that access is not restricted to specific CACs. It should be noted that the portal is a safe environment; it is password protected and encrypted, however this does not prevent unauthorised action being taken by those with access to the portal. If, for example, a person authorised by the company seeks to lodge an amendment in respect of a period the company was in receivership, the fact that the amendment request is not authorised may by identified by our systems and if so the amendment would not be processed. However, this will not occur in every case. Note that all transactions in the portal are logged; identifying the specific user taking the actions, and thus even if the amendment is processed, the fact the amendment request is unauthorised could later be identified.

The ATO take a risk based approach to reviewing lodgments, including amendments. This includes pre and post issue checks to identify fraudulent behaviour.

In light of the question that has been raised, we are considering whether further steps can be taken to reduce the risk of unauthorised amendments in these circumstances.

Meeting discussion

The ATO acknowledged that the situation as highlighted in the submission can occur on the portal. This issue has initiated action by the ATO to put in place steps to stop unauthorised amendments to BAS especially in these circumstances. The ATO considers this as a risk that requires further investigation and management to mitigate.

It was suggested by members that during the period that an entity was in insolvency, the ATO should incorporate steps to close off the incapacitated entity’s registration. The ATO is exploring ways for locking down those periods when administrators have been appointed or to trigger a review for amendments made to the BAS in those periods. The ATO is investigating the matter and how processes can be changed so that there is no reoccurrence.

The ATO also noted that access to the portal is logged, so unauthorised access in these cases can be identified. The ATO confirmed that if the representative entity has not made the relevant amendment (it has been made without authorisation by the formerly incapacitated entity), the representative entity would not be liable for a penalty if the amendment is a false or misleading statement.

Action item 2011.03.15
Amendments of BAS lodged by representatives of incapacitated entity
Description The ATO will provide an update out of session or at the next meeting on the progress made to have further controls in place so that BAS cannot be amended for periods in the past when an entity was incapacitated.
Responsibility ATO
Due date 15 June 2011
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