GST and the disposal of capital assets

When can you make a decreasing adjustment?

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 for one of the following:

• solely or partly for making financial supplies (for a definition of financial supplies, see Terms we use)
   
• 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 in relation to the purchase, 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 make any adjustments to this purchase.

Ian later 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)

= 1/11 x $550 x (0.2) = $50 x (0.2) = $10

Ian claims the decreasing adjustment of $10, which reduces the net amount of GST payable.

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 make any other adjustments in relation to this purchase.

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)

= 1/11 x $99 million x (0.6) = $9 million x 0.6 = $5.4 million

The credit union claims the decreasing adjustment of $5.4 million, which reduces the net amount of GST payable.

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)

= 1/11 x $121 million x (0.6) = $11 million x 0.6 = $6.6 million

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.