Have you ever sold a piece of equipment or a vehicle that your business owns and wondered how to handle the GST?
Understanding how to account for GST when disposing of capital assets is crucial for keeping accurate financial records.
This blog will explain the rules and steps you need to follow to correctly manage GST when selling or getting rid of your business’s capital assets.
We intend to write this blog so that you are well informed stay compliant with tax regulations and avoid any potential issues.
What Are Capital Assets?
Let’s take an example of a business like a business mover in Melbourne. They most likely own vehicles, storage units, and other equipment crucial for their everyday operations.
These essential items are considered capital assets. Capital assets are generally distinguished from inventory or raw materials by their intended use. Capital assets are not meant for sale in the ordinary course of business, but rather for use in generating income over a sustained period.
Understanding Capital Assets And GST
A capital asset is an item your business owns and uses to generate income. It’s not something you intend to sell in the normal course of business.
A few examples include:
- Machinery
- Vehicles
- Office equipment
- Land and buildings
If you registered for GST or are required to be registered, and you sell, transfer, or otherwise dispose of a capital asset, it’s generally considered a taxable sale. This means you need to account for GST on the sale.
When To Charge GST?
You’ll need to charge GST and report the payment you receive on your activity statement for the relevant tax period if:
- You sell, trade-in, or transfer ownership of a capital asset in Australia.
- You’re registered or required to be registered for GST.
This applies even if:
- You purchased the asset before 1 July 2000.
- You’re selling the asset to someone who isn’t in business (a private sale).
Selling Capital Assets And GST Implications
If you register for GST and sell, transfer, or dispose of a capital asset, it’s usually considered a taxable sale. You’ll need to account for GST on this sale.
Here’s what you need to do:
- Report the payment you receive for the asset (including GST) on your Activity Statement for the relevant tax period.
- Charge GST and account for it on your Activity Statement if:
- You sell, trade in, or transfer ownership of a capital asset in Australia.
- You’re registered or required to be registered for GST.
Exceptions To Charging GST On Disposed Assets
There are situations where you don’t have to charge GST when disposing of a capital asset.
These include:
- Non-business assets: This applies to assets not used in your business, like your family car.
- GST-free going concern: If you sell your entire business as a GST-free going concern, you don’t charge GST.
- Residential premises: Disposing of residential properties like apartment blocks (doesn’t apply to new residential premises or commercial premises) is GST-free.
- Farmland: You can avoid GST if the land has been used for farming for at least five years before disposal, and the buyer intends to continue using it for farming.
Impact Of GST Registration Cancellation On Held Capital Assets
If you cancel your GST registration and still have capital assets where you claimed GST credits, you might need to repay some of those credits. This is done by making an increasing adjustment on your final Activity Statement.
The increasing adjustment considers:
- The market value of the asset at the time of cancellation
- Percentage of business use of the asset
Example - Increasing Adjustment Calculation
Mr. Walker stops his business and cancels his GST registration. He has a vehicle with a market value of $22,000 and claimed GST credits for it earlier. The vehicle is used 80% for business purposes.
Here’s how to calculate the GST payable by Mr Walker:
(1/11) × $22,000 × 80% = $1,600
Therefore, Mr. Walker owes $1,600 in GST due to the increasing adjustment.
Decreasing Adjustments For Disposed Capital Assets
You might be entitled to a decreasing adjustment when disposing of a capital asset if it was used:
- Partly or solely for making financial supplies (e.g., lending or borrowing money)
- Partly for private or domestic purposes
The decreasing adjustment reduces the net amount of GST you owe for the tax period, not the GST payable on the asset sale itself. You can claim this adjustment in the same tax period when GST is payable on the asset’s sale.
Calculating The Decreasing Adjustment
Use the following formula to calculate the decreasing adjustment amount:
1/11 × price × (1 − adjusted GST credit ÷ full GST credit)
Where:
- Price is the selling price of the capital asset (including GST)
- Adjusted GST credit is the GST credit you claimed when acquiring the asset, plus or minus any adjustments you made later.
- Full GST credit is the GST credit you would have been entitled to claim if you purchased the asset solely for business use (excluding financial supplies).
There’s also a cap on this adjustment. It can’t be more than the difference between the full GST credit and the adjusted GST credit.
Unsure About GST On Disposed Capital Assets? KPG Taxation Can Help!
Selling a business asset can be a big deal, and understanding how GST applies can be confusing. Different rules are depending on what you’re selling and how you use it. For example, selling a used delivery van is different from selling a piece of land.
If you’re worried about getting GST right on your next asset sale, you don’t have to go it alone. Our expert business accountant team at KPG Taxation can help! We can explain the rules in a way that’s easy to understand and make sure you’re following all the regulations.
We can also help you with:
- Figuring out if you need to charge GST on the sale
- Calculating the amount of GST you owe
- Keeping track of your records
- Completing any necessary GST paperwork
Don’t let dealing with GST add stress to selling your business assets. Contact KPG Taxation today for a consultation. We’ll answer your questions and help you handle the process with ease.
