For assets you acquired before 11.45am (by legal time in the ACT) on 21 September 1999 and have held for 12 months or more, you can choose to use the indexation method or the discount method to calculate your capital gain. There is no one factor to use as a basis to select the better option as it depends on the type of asset you own, how long you have owned it, the dates you owned it and past rates of inflation. Because capital losses must be offset against capital gains before the discount is applied, your choice may also depend on the amount of capital losses that you have available. For information about when and how, see Choices.
Example 11: Comparison of discount and indexation methods
Justin sold some land and has a $10,000 capital gain under the discount method (before applying the CGT discount) or a $7,000 capital gain under the indexation method. If Justin has no capital losses, the discount method will produce the smaller capital gain (that is, $5,000).
However, Justin also made a capital loss of $5,000 on the sale of some shares. He will be better off using the indexation method to work out the capital gain from the sale of his land. Under this method, his net capital gain is $2,000 (that is, $7,000 minus $5,000). If he used the discount method, his net capital gain would be $2,500 (that is $10,000 minus $5,000, multiplied by 50%).
End of exampleExample 12 below shows that applying one method to work out your capital gains on a whole parcel of shares you acquired before September 1999 may not be to your advantage if you have capital losses or net capital losses to apply.
In this situation, you will get a better result if you apply the indexation method to sufficient shares to absorb the capital loss (or as much of the capital loss as you can) and apply the discount method to any remaining shares.
Example 12: Capital gains on shares where you also have capital losses
Clare sold a parcel of 500 shares in March 2011 for $12,500, that is, for $25 each. She had acquired the shares in March 1995 for $7,500, that is, for $15 each, including stamp duty and brokerage. There was no brokerage on the sale. Clare had no other capital gains or capital losses in 2010–11, although she has $3,500 net capital losses carried forward from previous income years.
Because Clare owned the shares for more than 12 months she can use the discount method or the indexation method to work out her capital gains, whichever gives her a better result. Clare decides to work out her net capital gain by applying both the discount method and the indexation method to the whole parcel of shares:
Using indexation method |
Using discount method |
|
Capital proceeds |
$12,500 |
$12,500 |
Cost base (acquisition cost x indexation factor) |
*$8,070 |
$7,500 |
Capital gain |
$4,430 |
$5,000 |
less capital losses |
$3,500 |
$3,500 |
$930 |
$1, 500 |
|
CGT discount |
Nil |
$750 |
Net capital gain |
$930 |
$750 |
*$7,500 x 1.076 (indexation factor is 123.4 ÷ 114.7 = 1.076)
However, because each share is a separate asset, Clare can use different methods to work out her capital gains for shares within the parcel. The lowest net capital gain would result from her applying the indexation method to the sale of 395** shares, and the discount method to the remaining 105. She works out her net capital gain as follows:
Indexation method (395 shares) |
|
Capital proceeds ($25 each) |
$9,875 |
Cost base (395 x $15 x 1.076) |
$6,375 |
Capital gain |
$3,500 |
less capital losses |
$3,500 |
Capital gain/(loss) |
Nil |
Discount method (105 shares) |
|
Capital proceeds ($25 each) |
$2,625 |
Cost base (105 x $15) |
$1,575 |
Capital gain |
$1,050 |
less any remaining capital losses |
nil |
$1,050 |
|
CGT discount |
$525 |
Net capital gain |
$525 |
** To calculate this, Clare worked out the capital gain made on each share using the indexation method ($4,430 ÷ 500 = 8.86) and divided the capital loss by this amount ($3,500 ÷ 8.86 = 395).
End of exampleIt is probably best to calculate your capital gain using both methods to find out which gives you the better result. This is shown for Val in the worked example 13 below and in the completed Capital gain or capital loss worksheet (PDF, 62KB).
Example 13: Choosing the indexation or discount method
Val bought a property for $150,000 under a contract dated 24 June 1991. The contract provided for the payment of a deposit of $15,000 on that date, with the balance of $135,000 to be paid on settlement on 5 August 1991.
She paid stamp duty of $5,000 on 20 July 1991. On 5 August 1991, she received an account for solicitor’s fees of $2,000, which she paid as part of the settlement process.
She sold the property on 15 October 2010 (the day the contracts were exchanged) for $350,000. She incurred costs of $1,500 in solicitor’s fees and $4,000 in agent’s commission.
Val’s capital gain calculated using the indexation method
Deposit x indexation factor |
$17,460 |
Balance x indexation factor |
|
Stamp duty x indexation factor |
$5,790 |
Solicitors fees for purchase of property x indexation factor |
|
Solicitors fees for sale of property |
$1,500 |
Agents commission |
$4,000 |
Cost base (total) |
$188,206 |
Val works out her capital gain as follows: |
|
Capital proceeds |
$350,000 |
less cost base |
$188,206 |
Capital gain |
$161,794 |
Assuming Val has not made any other capital losses or capital gains in the 2010–11 income year and does not have any unapplied net capital losses from earlier years, her net capital gain using the indexation method is $161,794.
Val’s capital gain calculated using the discount method
Deposit |
$15,000 |
Balance |
$135,000 |
Stamp duty |
$5,000 |
Solicitors fees for purchase of property |
$2,000 |
Solicitors fees for sale of property |
$1,500 |
Agents commission |
$4,000 |
Cost base (total) |
$162,500 |
Val works out her capital gain as follows: |
|
Capital proceeds |
$350,000 |
less cost base |
$162,500 |
Capital gain before applying discount |
$187,500 |
less CGT discount |
$93,750 |
Net capital gain |
$93,750 |
As the discount method provides Val with the better result, she will write the amount worked out using the discount method on her tax return rather than the amount worked out using the indexation method.
The Capital gain or capital loss worksheet (PDF, 62KB) shows how Val might complete the CGT summary worksheet (PDF, 205KB) using both methods.
End of example