What is a trade-in?

The dealer inspects the asset and makes an offer based on its condition and recent market data. If the asset still has finance on it, the dealer asks your financier for a payout figure. The trade-in credit is applied against that payout first, and anything left over goes towards the new purchase as a deposit. If the credit does not cover the payout, you pay the shortfall or it is rolled into the new finance.

Ownership then transfers, the paperwork is finalised, and title, registration and any security interest on the Personal Property Securities Register are updated. In some cases the financier will approve a novation instead, so another party takes over the obligation rather than the contract being paid out.

A trade-in offer sits below private sale value because the dealer takes on the reconditioning, the marketing and the resale risk. The main drivers are comparable retail and wholesale sales, mechanical and cosmetic condition, service history, age and usage (kilometres on a vehicle, hours on a machine), how sought-after the model is, and timing, since demand for some equipment is seasonal.

Presentation moves the number more than people expect. Full service history, a clean machine and small faults fixed will usually lift the offer. Get more than one quote, compare it against a private sale estimate, and negotiate the deal as a whole, because a dealer can move margin between the trade-in figure and the price of the new asset.

For a GST-registered business, a trade-in made in the course of business is generally a taxable supply, and GST is payable on the trade-in value unless the supply is input taxed. Confirm with the dealer whether the quoted figure is GST inclusive, because that one point changes the arithmetic on both sides of the deal.

Disposing of a depreciating asset by trade-in means the credit is treated as the capital proceeds, which can trigger a balancing adjustment. If the proceeds exceed the asset's tax adjustable value you may have assessable income; if they fall short, you may have a deduction. In the books, remove the asset at its carrying amount, record the proceeds, and treat the difference as a gain, loss or balancing adjustment. Check the ATO's guidance or ask your accountant.