Choosing the indexation or discount method

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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%).

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Example 12: Capital gains on shares where you also have capital losses

Clare sold a parcel of 500 shares in March 2018 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 2017–18, 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:

Comparison of indexation and discount methods

Calculation element	Using indexation method	Using discount method
Capital proceeds	$12,500	$12,500
Cost base (acquisition cost × indexation factor)	$8,077 (see note 1)	$7,500
Capital gain	$4,423	$5,000
less capital losses	$3,500	$3,500
Subtotal	$923	$1,500
CGT discount	Nil	$750
Net capital gain	$923	$750

Note 1: $7,500 × 1.077 (indexation factor is 68.7 ÷ 63.8 = 1.077)

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 (see note 2 below) 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 × $15 × 1.077 each)	$6,381
Capital gain	$3,494
less capital losses	$3,500
Capital gain/(loss)	$(6)

Discount method (105 shares)

Capital proceeds ($25 each)	$2,625
Cost base (105 × $15)	$1,575
Capital gain	$1,050
less any remaining capital losses	$6
	$1,044
CGT discount	$522
Net capital gain	$522

Note 2: To calculate this, Clare worked out the capital gain made on each share using the indexation method ($4,424 ÷ 500 = 8.85) and divided the capital loss by this amount ($3,500 ÷ 8.85 = 395).

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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 2017 (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 × indexation factor $15,000 × 1.164 (indexation factor is 68.7 ÷ 59.0 = 1.164)	$17,460
Balance × indexation factor $135,000 × 1.164	$157,140
Stamp duty × indexation factor $5,000 × 1.159 (indexation factor is 68.7 ÷ 59.3 = 1.159)	$5,795
Solicitor's fees for purchase of property x indexation factor $2,000 × 1.159	$2,318
Solicitor's fees for sale of property (indexation does not apply)	$1,500
Agent's commission (indexation does not apply)	$4,000
Cost base (total)	$188,213
Val works out her capital gain as follows:
Capital proceeds	$350,000
less cost base	$188,213
Capital gain (Val’s total current year capital gain using this method)	$161,787

Assuming Val has not made any other capital losses or capital gains in 2017–18 and does not have any unapplied net capital losses from earlier years, her net capital gain using the indexation method is $161,787.

Val’s capital gain calculated using the discount method

Deposit	$15,000
Balance	$135,000
Stamp duty	$5,000
Solicitor's fees for purchase of property	$2,000
Solicitor's fees for sale of property	$1,500
Agent's 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 (Val’s total current year capital gain using this method)	$187,500
less CGT discount (as Val has no capital losses)	$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, 100KB)This link will download a file shows how Val might complete the worksheet using both methods.

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