• ### Choosing between the indexation and discount methods

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This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

End of attention

For assets you have held for 12 months or more, you may have the choice of using either the indexation method or the discount method to calculate your capital gain. There is no one factor you can use as a basis to select the best option, as it depends on the type of asset you own, how long you have owned it, the dates you owned it and the past rates of inflation. It is probably best to calculate your capital gain using both methods to find out which gives you the best result. This is shown in the worked example for Val and the completed Capital gain or loss worksheet following it.

Example: Choosing the indexation or the 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 solicitors fees of \$2,000, which she paid as part of the settlement process.

She sold the property on 15 October 2000 (the day the contracts were exchanged) for \$215,000. She incurred costs of \$1,500 in solicitors fees and \$4,000 in real estate fees.

Val's capital gain using the indexation method

 Deposit × indexation factor\$15,000 × 1.164(indexation factor is 123.4 ÷ 106.0 =1.164) \$17,460 Balance × indexation factor\$135,000 × 1.158 \$156,330 Stamp duty × indexation factor\$5,000 × 1.158(indexation factor is 123.4 ÷ 106.6 = 1.158) \$5,790 Solicitors fees for purchase of property × indexation factor\$2,000 × 1.158(indexation factor is 123.4 ÷ 106.6 = 1.158) \$2,316 Solicitors fees for sale of property (indexation does not apply) \$1,500 Real estate fees (indexation does not apply) \$4,000 Cost base (total) \$187,396

Val works out her capital gain as follows:

 Capital proceeds \$215,000 Less cost base \$187,396 Capital gain (Val's total current year capital gain using this method) \$27,604

Assuming Val has not made any other capital losses or capital gains in the 2000-01 year and does not have any prior year net capital losses, her net capital gain using the indexation method is \$27,604.

Val's capital gain using the discount method

 Deposit \$15,000 Balance \$135,000 Stamp duty \$5,000 Solicitors fees \$2,000 Solicitors fees \$1,500 Real estate fees \$4,000 Cost base (total) \$162,500

Val works out her capital gain as follows:

 Capital proceeds \$215,000 Less cost base \$162,500 Discount capital gain \$52,500

(Val's total current year capital gain for this method)

 Less 50% discount(as Val has no capital losses) \$26,250 Net capital gain \$26,250

As the discount method provides Val with the best result, she will show the amounts worked out using the discount method in her tax return rather than the amounts worked out using the indexation method.

The following shows how Val might complete the Capital gain or loss worksheet using both methods.