• GST and the disposal of capital assets

    Attention

    For the purposes of this document the GST term financial supplies can include the:

    • lending or borrowing of money
    • buying or selling of shares or other securities
    • creation, transfer, assignment or receipt of an interest in, or a right under, a super fund
    • provision or receipt of credit under a hire purchase agreement entered into before 1 July 2012, if the credit is provided for a separate charge that is disclosed to the purchaser.

    However, all components of supplies under a hire purchase agreement, entered into on or after 1 July 2012, will be considered taxable supplies. This is regardless of whether the interest charge is separately identified and disclosed.

    Financial supplies are input taxed.

    End of attention

    Capital assets

    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
    • land and buildings.

    Find out more

    Paragraphs 31-36 of GSTR 2001/7External Link Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover

    End of find out more

    Sales of capital assets and 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. In working out your projected GST turnover, you do not include amounts received for capital asset disposals. Therefore, 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 (or $150,000 or more for non-profit entities).

    Disposal of a capital asset

    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 sale 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.

    When we say dispose, we mean sell, trade-in or transfer ownership.

    Find out more

    GST definitions: payment, purchase

    End of find out more

    When you don’t account for GST

    Generally, you don’t have to account for GST when you dispose of a capital asset if the asset is any of the following:

    • 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)
    • 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.

    Find out more

    GSTR 2002/5External Link Goods and services tax: when is a 'supply of a going concern' GST-free?

    End of find out more

    If you are an endorsed charitable institution, an endorsed trustee of a charitable fund, a gift-deductible entity or a government school (or a non-profit sub-entity of one of these organisations) and you dispose of a capital asset, the disposal will be GST-free if the payment or consideration you receive is either of the following:

    • less than 50% of the GST-inclusive market value of the asset
    • 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.

    Making 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 the note above)
    • 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:

    Formula = 1/11 x Price x (1 – Adjusted GST credit / Full GST credit)

    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 
    • 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.

    Find out more

    GST definitions: GST credit, sales

    End of find out more

    Example 1: 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

    End of example

    Example 2: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.

    End of example

    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

    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 $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.

    End of example

    Applying the decreasing adjustment to the GST payable

    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 any of the following:

    • 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
    • a motor vehicle for which GST credits were disallowed because of the GST transitional rules.

    Find out more

    GSTR 2004/8 External LinkGoods and services tax: when does an entity have a decreasing adjustment under Division 132?

    End of find out more
      Last modified: 06 May 2014QC 16711