When you sell a car that cost more than the car limit, you pay GST of one eleventh of the full sale price even though your GST credit on purchase was capped. For income tax, the termination value is scaled down in proportion to the car limit, so the taxable profit is much smaller than the raw proceeds suggest.

This is one of those areas where the intuitive answer is wrong in both directions. Business owners assume the GST will be small because the credit was small, and it is not. They then assume they will be taxed on the full sale price less written down value, and they are not. Get it wrong either way and you either overpay tax or get a surprise on your next BAS.

I am Mina Baselyous, a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent in Melbourne. This article works through exactly what happens when a business sells a car that cost more than the car limit, with a full worked example on a $150,000 vehicle sold for $95,000.

What the Car Limit Is and What It Cost You on the Way In

The car limit caps the amount you can depreciate on a passenger car. For the 2026-27 financial year the limit is $69,883, and the maximum GST credit you can claim on a car above that limit is $6,353, being one eleventh of the car limit. Spend more than that on a car and the excess is permanently outside the tax system.

Those figures are published by the ATO in its car thresholds from 1 July guidance for 2026-27. For comparison, the limit was $69,674 for both 2024-25 and 2025-26, with a GST credit cap of $6,334. The limit that matters to you is the one for the financial year in which you first used the car, not the year you sell it.

Mechanically, two provisions of the Income Tax Assessment Act 1997 do the work. Section 40-230 reduces the first element of the cost of a car to the car limit where the cost exceeds it. Subdivision 27-B strips out the GST credit you were entitled to before that cap is applied. So the sequence is: purchase price, less the capped GST credit, then reduced to the car limit.

It is worth being clear about what the car limit is not. It is not the luxury car tax threshold, which sits at $91,661 for fuel efficient vehicles and $80,809 for all other vehicles in 2026-27. Those are two different numbers doing two different jobs, and confusing them is one of the more common errors we see on client files.

The car limit also applies under the simplified depreciation rules. As the ATO states in its assets and exclusions guidance, if the cost of your car in the year you start to hold it exceeds the car limit, the car’s cost is reduced to the car limit for that year. There is no instant asset write off workaround for an expensive car. If you want the background on how depreciation itself works, see our guides to tax depreciation and the $20,000 instant asset write off.

The GST Trap on the Way Out

Here is the part that catches people. The car limit caps what you can claim on the way in. It does nothing at all on the way out. The ATO’s position is plain: when you dispose of a motor vehicle used in your business and the disposal is a taxable sale, you will generally be liable to pay GST of one eleventh of the sale price of the vehicle.

There is no proportional reduction, no cap, and no adjustment to reflect the fact that you only got $6,353 back when you bought it. The ATO sets this out in its guidance on disposing of a motor vehicle, current as at September 2026, and it applies equally to a trade in. Trading a vehicle in against a new one is still a taxable sale, even though no cash changes hands for that leg of the deal.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), this is the number that ruins a quarter. A client sells a car for $95,000, treats it as a windfall, spends the money, and then finds out in April that $8,636 of it belonged to the ATO. The GST on the sale of one car can exceed an entire quarter’s normal net GST position for a small services business. It is reported on the activity statement for the period of the sale, so if you are unsure how that works start with what a BAS is.

The Income Tax Side: How the Balancing Adjustment Works

For income tax, selling a depreciating asset triggers a balancing adjustment under section 40-285. You compare the termination value with the adjustable value, which is the written down value for tax purposes. If the termination value is higher, the difference is assessable income. If it is lower, you get a deduction. There is no capital gains tax on a car used wholly for business.

For a cost limited car, two adjustments happen before that comparison is made, and this is where most of the value sits.

Adjustment One: Strip Out the GST

Section 27-95 reduces the termination value of a depreciating asset by the GST payable on the sale where the disposal is a taxable supply. So if you sell for $95,000 including GST, the starting termination value for income tax purposes is $86,364, not $95,000. This is the same logic that made your original cost GST exclusive.

Adjustment Two: Scale It Down for the Car Limit

This is the provision almost nobody knows about, and it is the one that saves you. Section 40-325 says that where the cost of a car was worked out by applying the car limit, the termination value is multiplied by a fraction: the car limit plus any second element cost amounts, divided by the total cost of the car ignoring the car limit, after applying Subdivision 27-B.

In plain English: you were only allowed to depreciate part of the car, so you are only taxed on the matching part of the sale proceeds. If the car limit represented 48 per cent of what you actually paid, only about 48 per cent of the sale proceeds counts as your termination value. Without this provision, the tax result on selling a cost limited car would be brutal.

Note the wording: the car limit used in the fraction is the limit for the financial year in which you first used the car for any purpose. If you bought the car three years ago, you use that year’s limit, not the current one.

Worked Example: A $150,000 Car Sold for $95,000

Take a company that buys a passenger car for $150,000 including GST in 2026-27, uses it 100 per cent for business, and sells it three years later for $95,000 including GST. The economic result is a $55,000 loss. The tax result is $8,636 of GST payable and roughly $12,500 of assessable income. Here is how you get there.

Step 1: The Purchase

• Purchase price including GST: $150,000
• GST included in the price: $150,000 divided by 11 = $13,636
• GST credit actually claimable: capped at one eleventh of the car limit = $6,353
• GST you never get back: $13,636 less $6,353 = $7,283
• Cost after Subdivision 27-B: $150,000 less $6,353 = $143,647
• First element of cost after section 40-230: reduced to the car limit = $69,883
• Cost permanently outside the depreciation system: $73,764

Step 2: Three Years of Depreciation

Assume the company claims $40,401 of decline in value over three years on the capped cost of $69,883, leaving an adjustable value of $29,482. The exact numbers depend on the depreciation method and effective life you use, but the principle holds: you are only ever depreciating the capped amount, never the full $150,000.

Step 3: The Sale, GST First

• Sale price including GST: $95,000
• GST payable on the sale: $95,000 divided by 11 = $8,636
• GST credit claimed on purchase: $6,353
• Net GST position across the life of the car: $2,283 worse off

Read that last line again. The business paid more GST out on a car that halved in value than it ever claimed back. That is the direct consequence of a cap on the credit with no matching cap on the liability.

Step 4: The Sale, Income Tax

• Termination value before adjustment: $95,000 less GST of $8,636 = $86,364
• Section 40-325 fraction: $69,883 divided by $143,647 = 48.65 per cent
• Adjusted termination value: $86,364 multiplied by 48.65 per cent = $42,016
• Less adjustable value: $29,482
• Assessable balancing adjustment: $12,534

Now compare that with what would happen if section 40-325 did not exist. The termination value would be $86,364, the adjustable value $29,482, and the assessable amount $56,882. The car limit adjustment reduces the assessable income by more than $44,000 on this single transaction. It is worth making sure your accountant has actually applied it.

Step 5: The Full Picture

The company spent $150,000, recovered $95,000, and is $55,000 out of pocket in cash terms. Across the three years it claimed $40,401 in depreciation and $6,353 in GST credits. On sale it owes $8,636 in GST and adds $12,534 to its taxable income, which at a 25 per cent company rate is about $3,134 of tax. Roughly $73,764 of the original cost was never deductible at all. That is before you count the opportunity cost of $150,000 of working capital locked into a depreciating asset rather than funding the business.

That is the real cost of buying an expensive car through a business, and it is why we run the numbers before the purchase rather than after. If you are weighing up vehicle decisions more broadly, our guide to car tax deductions and the cents per kilometre rate for 2026-27 cover the alternatives.

Do You Pay Luxury Car Tax When You Sell?

Usually not. Luxury car tax does not apply to a car that has not been imported and was manufactured more than 2 years before the supply, or where the car was imported more than 2 years before the supply. For most business owners selling a car they have owned for a few years, LCT is simply not in the picture.

That 2 year rule, along with the other exclusions, is set out in the ATO’s when LCT does not apply guidance. Where it does bite is on a near new car sold within two years of manufacture or import, above the relevant threshold, in the course of your business. If you are flipping a vehicle quickly, get the LCT position checked before you sign anything.

Five Things That Change the Answer

The worked example above assumes the simplest possible facts: a passenger car, 100 per cent business use, held directly, sold at arm’s length for cash. Change any of those and the numbers move. These are the five variations we see most often on client files, and each one is worth checking before the sale rather than after.

1. Private Use

If the car was used partly for private purposes, the balancing adjustment is reduced to reflect the non taxable use, in the same proportion that your depreciation deductions were reduced. You cannot depreciate the private portion and you are not taxed on it either. You need a defensible log book or usage record to support the split, and our guide to claiming motor vehicle expenses covers what the ATO expects.

2. The Vehicle Is Not a Car

The car limit applies to a car designed mainly for carrying passengers. A vehicle designed to carry a load of one tonne or more, or nine or more passengers, is not a car for these purposes, so the limit does not apply and neither does the GST credit cap. This is why a genuine one tonne ute or a truck is treated completely differently to a large passenger SUV of the same price.

3. The Car Sits in a Small Business Pool

If you use simplified depreciation, the car limit still restricted what went into the pool in the first place, but the mechanics on disposal differ. The proceeds reduce the pool balance rather than producing a standalone balancing adjustment, which can change both the amount and the timing of the taxable outcome. Have your adviser confirm the treatment for your specific pool position.

4. It Is a Trade In, Not a Cash Sale

A trade in is a taxable sale. The trade in allowance is your sale price for both GST and income tax purposes, and it is easy to miss because the dealer nets it off against the new vehicle. Check the contract: the trade in figure needs to be recorded as a sale in your accounts, with GST accounted for on it, not just deducted from the cost of the replacement.

5. You Are Selling to Yourself or a Related Entity

This is where the most expensive mistakes happen. Transferring a car out of a company to its owner at a token price is not a private matter. Under the GST rules, supplies to associates for no or inadequate consideration are generally taxed on market value where the associate is not entitled to a full input tax credit, and under Division 7A a transfer of company property for less than market value can be treated as a deemed dividend.

In our experience, this is the single most common way a simple vehicle transfer turns into a Division 7A problem that has to be unwound years later. If you are moving a vehicle between entities you control, get the valuation and the paperwork right first. Our guide to Division 7A explains what is at stake.

How to Plan the Sale Properly

The tax outcome on a vehicle sale is largely set by the time you sign the contract, but three decisions are still in your hands: the timing of the sale, the way the proceeds are documented, and whether the cash for the GST and tax is set aside. Deal with those before you list the car, not when the BAS falls due.

• Model the numbers before you sell. Work out the GST payable and the balancing adjustment on the expected sale price, and check which financial year the sale lands in.
• Quarantine the GST immediately. The moment the funds hit the account, move one eleventh of the sale price into a separate account. It is not your money.
• Consider the timing. A balancing adjustment in a year you already have high profits is worse than one in a quieter year. Where there is flexibility in settlement dates, use it.
• Check the replacement decision at the same time. If you are replacing the vehicle, the car limit will apply again on the new one, and the choice between owning, novated leasing or an electric vehicle changes the answer materially. Our article on the electric vehicle FBT exemption covers one of those options.
• Keep the file. Contract, trade in documentation, odometer readings, log book and the depreciation schedule. If the ATO reviews the balancing adjustment, this is what defends it.

This is straightforward work when it is done in advance and expensive when it is not. It is exactly the kind of decision that belongs in a tax planning conversation in April or May, alongside the rest of your small business deductions, rather than being discovered at lodgement in the following March.

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