GST on Disposal of Non-Current Assets

Understanding GST

• Goods and Services Tax (GST): A broad-based tax of 10% on most goods, services and other items sold or consumed in Australia.
• GST Registered Entities: Businesses registered for GST are required to collect GST on sales and can claim GST credits on eligible purchases.
• GST Clearing Account: A ledger account used to record GST collected on sales and GST paid on purchases. The balance reflects the net GST owed to or refundable from the ATO.

KEY TAKEAWAY: GST is a 10% tax levied on most goods and services in Australia. Businesses act as collection agents for the ATO.

GST and Non-Current Assets

• Non-Current Assets: Assets with a life exceeding one accounting period, used to generate revenue (e.g., equipment, vehicles, buildings).
• GST on Purchase: GST paid on the purchase of a non-current asset is claimed as a GST credit.
• GST on Disposal: When a non-current asset is sold, GST is charged on the selling price if the business is GST registered.

VCAA FOCUS: Understanding the GST implication on both purchase and disposal of non-current asset is key.

Cash Disposal of Non-Current Assets

• Cash Disposal: Selling a non-current asset for cash.
• Calculating GST on Disposal: GST is 10% of the cash received from the sale.
  $$GST = \frac{Selling Price}{11}$$

• Journal Entry for Cash Disposal (with GST):

  Account	Debit	Credit
  Bank	\$XXX
  Accumulated Depreciation	\$YYY
  Disposal of Asset		\$ZZZ
  GST Clearing		\$AAA
  Original Cost of Asset		Cost
  Asset (e.g. Equipment)		\$BBB
  Profit/Loss on Disposal

  Where:
  * XXX = Cash received from sale
  * YYY = Accumulated depreciation of the asset being disposed
  * ZZZ = Original Cost - Accumulated Depreciation - Cash Received
  * AAA = GST collected on sale ($Selling Price / 11$)
  * BBB = Original Cost of Asset.

• Profit/Loss on Disposal Calculation:
  Profit/Loss = Cash Received - (Carrying Amount - GST)
  Where:

  • Carrying Amount = Original Cost - Accumulated Depreciation

REMEMBER: GST is only calculated on the selling price of the asset.

Reporting GST on Disposal

• Income Statement:
  • Profit or Loss on Disposal is reported as either revenue or expense, respectively. GST is not included in this calculation.
• Balance Sheet:
  • The non-current asset is removed from the balance sheet.
  • Accumulated depreciation related to that asset is also removed.
  • GST Clearing account is adjusted to reflect the GST collected on the disposal.
• Cash Flow Statement:
  • The cash received from the disposal is reported as an inflow in the Investing Activities section. The total cash inflow, which includes the GST component, is reported.

EXAM TIP: Pay close attention to the wording of the question. If it asks for the “cash received,” include the GST. If it asks for the “profit/loss on disposal,” exclude the GST.

Example Scenario

A business sells a machine for \$5,500 cash (including GST). The machine originally cost \$10,000 and had accumulated depreciation of \$6,000.

1. Calculate GST:
   $$GST = \frac{\$5,500}{11} = \$500$$
2. Calculate Carrying Amount:
   $$Carrying Amount = \$10,000 - \$6,000 = \$4,000$$
3. Calculate Profit/Loss on Disposal:
   Profit/Loss = Cash Received - (Carrying Amount)
   $$Profit = \$5,000 - \$4,000 = \$1,000$$

4. Journal Entry:

   Account	Debit	Credit
   Bank	\$5,500
   Accumulated Depreciation	\$6,000
   Disposal of Equipment		\$1,000
   GST Clearing		\$500
   Equipment		\$10,000

5. Reporting:

   • Income Statement: Profit on Disposal of Equipment: \$1,000
   • Balance Sheet: Equipment and related accumulated depreciation are removed. GST Clearing is adjusted.
   • Cash Flow Statement: Cash inflow from sale of equipment (investing activities): \$5,500

COMMON MISTAKE: Forgetting to account for accumulated depreciation when calculating profit or loss on disposal, or incorrectly including GST when calculating the profit/loss.

Trade-In of Non-Current Assets

• Trade-in is when an old asset is exchanged for a new asset, with the difference in value paid in cash.
• The accounting treatment is similar to a cash disposal, but the “cash received” is represented by the trade-in allowance.
• GST is calculated on the invoice price of the new asset, not the trade-in value.

STUDY HINT: Practice journal entries for various disposal scenarios, including those with profits, losses, and trade-ins.

GST Clearing Account Balance

• The GST Clearing account can have either a debit or credit balance.
• Credit Balance: The business owes GST to the ATO (GST on sales > GST on purchases). This is a current liability.
• Debit Balance: The ATO owes GST to the business (GST on purchases > GST on sales). This is a current asset (GST refund).

APPLICATION: Understanding GST on disposal is crucial for accurate financial reporting and compliance with tax regulations.