• Choosing the indexation or discount method

    Attention

    Warning:

    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 choose to use 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 better 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. 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 example, 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 ($7,000 - $5,000). If he used the discount method his net capital gain would be $2,500 [($10,000 - $5,000) 50%].

    It 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 below and the completed Capital gain or capital loss worksheet.

    Example - 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 solicitors fees of $2,000, which she paid as part of the settlement process.

    She sold the property on 15 October 2003 (the day the contracts were exchanged) for $215,000. She incurred costs of $1,500 in solicitors fees and $4,000 in agents commission.

    Val's capital gain calculated using the indexation method

    Deposit x indexation factor
    $15,000 x (123.4   106.0 = 1.164)

    =

    $17,460

    Balance x indexation factor
    $135,000 x (123.4   106.6 = 1.164)

    =

    $157,140

    Stamp duty x indexation factor
    $5,000 x (123.4   106.6 = 1.158)

    =

    $5,790

    Solicitors fees for purchase of property x indexation factor
    $2,000 x (123.4   106.6 = 1.158)

    =

    $2,316

    Solicitors fees for sale of property
    (indexation does not apply)

     

    $1,500

    Agents commission (indexation does not apply)

     

    $4,000

    Cost base (total)

     

    $188,206

    Val works out her capital gain as follows:

    Capital proceeds

     

    $215,000

    less cost base

     

    $188,206

    Capital gain

     

    $26,794

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

     

     

    Assuming Val has not made any other capital losses or capital gains in the 2003-04 income year and does not have any prior year net capital losses, her net capital gain using the indexation method is $26,794.

    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

     

    $215,000

    less cost base

     

    $162,500

    Capital gain before applying discount
    (Val's total current year capital gain using this method)

     

    $52,500

    less 50% discount
    (as Val has no capital losses)

     

    $26,250

    Net capital gain

     

    $26,250

    As the discount method provides Val with the better result, she will show the amount worked out using the discount method on her tax return rather than the amount worked out using the indexation method.

    The worksheet example (PDF) shows how Val might complete the Capital gain or capital loss worksheet

    End of example

    using both methods.

    Last modified: 04 Mar 2016QC 27527