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Terms we use
When we say:
- you, we mean you as a GST-registered business
- dispose, we mean sell, trade in or transfer ownership
- sale or purchase, we are referring to the GST terms supply and acquisition, and
- GST credit, we are referring to the GST term input tax credit.
For the purposes of this document, provided certain requirements are met, the GST term financial supplies can include:
- the lending or borrowing of money
- the buying or selling of shares or other securities
- the creation, transfer, assignment or receipt of an interest in, or a right under, a superannuation fund, and
- the provision or receipt of credit under a hire purchase agreement if the credit is provided for a separate charge that is disclosed to the purchaser.
Financial supplies are input taxed.
A capital asset is generally an asset which is retained by an enterprise for the purpose of earning revenue. A capital asset is not intended for sale in the ordinary course of business.
Capital assets include things like motor vehicles, manufacturing machinery, office equipment or land and buildings.
Do I have to register if the sale of a capital asset brings my turnover above the registration turnover threshold?
You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the turnover threshold of $75,000 (or $150,000 if you are a non-profit body).
To decide if your GST turnover meets the turnover threshold, you must examine your current and/or projected GST turnover. But in working out your projected GST turnover, you do not include amounts received for capital asset disposals. Thus, entities that are not registered for GST are not required to register for GST merely because the sale proceeds of a capital asset is $75,000 or more ($150,000 for non-profit entities).
Generally, if you are registered or required to be registered for GST, the disposal of a capital asset in Australia, in the course of carrying on your business, is a taxable supply and you are required to account for GST on that sale. This applies even if the asset was purchased before 1 July 2000 or the asset is sold to an individual who is not in business (a private sale). If you receive any payment (or other form of consideration) when you dispose of a capital asset, you must report an amount at G1 (total sales) on your activity statement for the relevant tax period.
Generally, you don’t have to account for GST when you dispose of a capital asset if the asset is:
- not a business asset, for example, your family car that has not been used in your business
- part of a business sold as a GST-free going concern
- residential premises, for example a block of residential apartments. This does not apply to new residential premises or commercial premises, or
- farm land. The land must be land on which a farming business has been carried on for at least the five years before the disposal, and the purchaser must intend that the land will continue to be used for a farming business.
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For more information about the sale of a business or enterprise as a going concern, see Goods and Services Tax Ruling GSTR 2002/5.
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If you are a charitable institution, a trustee of a charitable fund, a gift-deductible entity or a government school and you dispose of a capital asset, the disposal will be GST-free if the payment or consideration you receive is:
- less than 50% of the GST-inclusive market value of the asset, or
- less than 75% of the amount you paid (or were liable to pay) to purchase the asset being sold. This is generally the original cost of the asset.
You may be entitled to a decreasing adjustment when you dispose of a capital asset that you purchased or subsequently used if the asset was used:
- solely or partly for making financial supplies (see ‘Terms we use’ on page 1 for a definition of financial supplies), or
- partly for private or domestic purposes.
The decreasing adjustment does not reduce the amount of GST payable on the sale of the asset, but reduces the net amount of GST you are liable to pay for the tax period.
You use the following formula to calculate the amount by which you can reduce the GST payable:
Where:
- price is the price for which you sell the capital asset
- adjusted GST credit is the GST credit you claimed when you acquired the capital asset, plus or minus any other adjustments you subsequently made to the GST credit, and
- full GST credit is the GST credit you would have been entitled to claim if you had purchased the capital asset solely for use in your business, but not for making input taxed supplies.
Example 1
Calculating the decreasing adjustment on capital assets used for private purposes
Ian runs a plumbing business and is registered for GST. He bought a station wagon for $1,100 (including $100 GST). Ian planned to use the vehicle 80% for his business and 20% for private purposes, so he claimed a GST credit of $80 (that is, 80% of the GST included in the purchase price). He did not claim any adjustments to this GST credit.
Ian sold the station wagon for $550 (including $50 GST) and the sale was a taxable sale. He is entitled to a decreasing adjustment because he couldn’t claim a full GST credit when he bought the car because it was partly for private use.
Ian uses the formula to calculate the decreasing adjustment.
= 1/11 x $550 x (1 – $80/$100)
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= 1/11 x $550 x ($0.2)
= $50 x ($0.2)
= $10
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Ian claims the decreasing adjustment of $10, which reduces the net amount of GST payable to the Tax Office.
Example 2
Calculating the decreasing adjustment on capital assets used to make financial supplies
A credit union bought a building for $110 million (including $10 million GST). It planned to use the building 60% for making financial supplies and 40% for taxable business activities, so claimed a GST credit of $4 million (that is, 40% of the GST included in the purchase price). The credit union did not claim any other adjustments to this GST credit.
The credit union later sold the building for $99 million (including $9 million GST) as a taxable sale. It is entitled to a decreasing adjustment as it couldn’t claim a full GST credit when it bought the building because the building was used partly for making financial supplies.
The credit union uses the above formula to calculate the decreasing adjustment:
= 1/11 x $99 million x (1 - $4 million/$10 million)
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= 1/11 x $99 million x ($0.6 million)
= $9 million x $0.6 million
= $5.4 million
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The credit union claims the decreasing adjustment of $5.4 million, which reduces the net amount of GST payable to the Tax Office.
Capping rule
If the decreasing adjustment on the sale of a capital asset is more than the difference between the full GST credit and the adjusted GST credit, you can reduce the GST only by that difference.
Example 3
Capping the decreasing adjustment
If the credit union in the previous example, sold the building for $121 million (including $11 million GST) as a taxable sale, it would calculate the decreasing adjustment as follows:
= 1/11 x $121 million x (1 – $4 million/$10 million)
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= 1/11 x $121 million x ($0.6 million)
= $11 million x $0.6 million
= $6.6 million
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The credit union then calculates the difference between the full GST credit and the adjusted GST credit ($10 million – $4 million = $6 million). Because the decreasing adjustment calculation results in an adjustment of $6.6 million, the credit union must cap the decreasing adjustment at $6 million.
You apply the decreasing adjustment in the same tax period as the GST is payable on the sale of the asset.
You are not entitled to the decreasing adjustment on the sale of:
- a capital asset purchased before 1 July 2000
- a capital asset purchased before an entity is registered
- a capital asset purchased from a non-registered entity, or
- a motor vehicle for which GST credits were disallowed because of the GST transitional rules.
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For more information about decreasing adjustments see Goods and Service Tax ruling GSTR 2004/8.
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If you are registered for GST and you dispose of a capital asset that is ‘real property’, you must account for GST unless the disposal is a GST-free or input taxed sale. For GST purposes, ‘real property’ includes:
- an interest in land or a right over land, for example, easements
- a personal right to be granted such rights or interests, for example, options
- a licence to occupy land, or
- any other contractual right exercisable in relation to land, for example, a restrictive covenant.
If you make a taxable sale of real property, GST is one-eleventh of the sale price. For example, if you sell a block of land for $66,000, the GST is $6,000.
However, if you are entitled to use the margin scheme, GST is one-eleventh of the ‘margin’, rather than one-eleventh of the sale price.
Depending on when the property was purchased and who it was purchased from, the margin is generally the difference between the sale price and:
- the amount you paid for the property, or
- an approved valuation of the property at a given date.
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For more information about when you can use the margin scheme, see:
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If you cancel your GST registration and you still hold capital assets on which you have claimed or are entitled to claim GST credits, the amount of GST you are liable to pay is subject to an increasing adjustment. The increasing adjustment takes into account the market value and percentage of business use of the assets at the time your GST registration is cancelled. The GST should be paid in the final activity statement you lodge.
The GST payable is:
Example 4
Calculating the increasing adjustment on capital assets to be shown in your final activity statement
Mr Sample ceases business and cancels his GST registration. He has a motor vehicle on hand that has a market value of $22,000. Mr Sample claimed GST credits for this motor vehicle in an earlier activity statement. The vehicle is used 80% for business purposes.
The GST payable by Mr Sample is:
For more information about GST and the disposal of capital assets, refer to:
To obtain a copy of these publications or to obtain further information, you can:
- visit our website at www.ato.gov.au
- phone 13 28 66, or
- write to us at PO Box 9990 in your capital city.
If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.
If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.
Last Modified: Thursday, 15 January 2009
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