GST and Trade-ins of Non-Current Assets

Understanding GST

• Goods and Services Tax (GST): A 10% tax levied on most goods, services, and other items sold or consumed in Australia.
• GST Registered Businesses: Businesses registered for GST can claim input tax credits for GST included in the price of their business purchases.
• GST on Sales: GST is collected on sales and remitted to the Australian Taxation Office (ATO).

KEY TAKEAWAY: GST is generally applied to most transactions, but there are some exceptions which we will discuss.

Trade-ins of Non-Current Assets

• Trade-in: Occurs when a business exchanges an existing asset for a new asset, with the value of the old asset reducing the purchase price of the new one.
• Non-Current Assets: Assets that provide a benefit to the business for more than one accounting period (e.g., vehicles, equipment, machinery).

The GST Exemption on Trade-ins

• No GST on Trade-in Value: When a non-current asset is traded in, GST is not applied to the trade-in value of the old asset. This is a specific exemption under Australian GST law.
• GST on New Asset: GST is applied to the remaining balance (cash paid) for the new asset after deducting the trade-in value.

VCAA FOCUS: VCAA exams often test the understanding of this specific GST exemption.

Example

A business trades in an old machine valued at \$5,000 for a new machine priced at \$22,000 (excluding GST) before the trade-in.

1. Purchase Price (before trade-in): \$22,000
2. Trade-in Value: \$5,000
3. Balance Payable: \$22,000 - \$5,000 = \$17,000
4. GST Calculation: 10% of \$17,000 = \$1,700
5. Total Payable: \$17,000 + \$1,700 = \$18,700

In this case, GST is calculated only on the \$17,000 balance paid, not on the entire \$22,000 value of the new machine.

EXAM TIP: Always carefully identify the trade-in value and calculate GST only on the net amount paid.

General Journal Entries for Trade-ins

Example Scenario

Swing Seats trades in an old van for \$7,000 on a new van costing \$40,000 (plus GST). The old van originally cost \$30,000 and has accumulated depreciation of \$20,000.

Steps and Journal Entries

1. Record Disposal of Old Van:

   • Debit: Disposal of Van (\$30,000 - Original Cost)
   • Credit: Van (\$30,000)

   Debit: Accumulated Depreciation of Van (\$20,000)
   Credit: Disposal of Van (\$20,000)*

   Debit: Van (\$7,000 - Trade in Value)
   Credit: Disposal of Van (\$7,000)*

2. Calculate Profit/Loss on Disposal:

   • Carrying Amount of Old Van: \$30,000 (Cost) - \$20,000 (Accumulated Depreciation) = \$10,000
   • Trade-in Value: \$7,000
   • Loss on Disposal: \$10,000 - \$7,000 = \$3,000

   Debit: Loss on Disposal (\$3,000)
   Credit: Disposal of Van (\$3,000)*

3. Record Purchase of New Van:

   Debit: Van (\$40,000)
   Debit: GST Clearing (\$4,000 - 10% of \$40,000)
   Credit: Bank (\$44,000)

   • GST is calculated only on the \$40,000.

4. Combined Journal Entry (Alternative Presentation):

COMMON MISTAKE: Forgetting to account for accumulated depreciation when calculating profit or loss on disposal.

Reporting Implications

Income Statement

• Loss on Disposal: The loss on disposal (\$3,000 in the example above) is reported as an expense in the Income Statement.
• Profit on Disposal: If the trade-in value exceeds the carrying amount, the profit is reported as revenue in the Income Statement.

Balance Sheet

• Van Account: The new van’s cost (\$40,000 in the example) is recorded in the asset section of the Balance Sheet.
• Accumulated Depreciation: Depreciation will be calculated and recorded for the new van over its useful life. The accumulated depreciation for the old van is removed.

Cash Flow Statement

• Cash Outflow: The cash payment for the new van (\$44,000 in the example) is reported as an outflow in the investing activities section.
• Trade-in is NOT a cash inflow.

APPLICATION: Understanding the correct GST treatment is crucial for accurate financial reporting and tax compliance.

Summary

STUDY HINT: Practice various trade-in scenarios to reinforce your understanding of the GST treatment and journal entries.