• Capital gain calculation methods

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    Indexation method

    Discount method

    'Other' method

    Description of method

    Allows you to increase the cost base by applying an indexation factor based on CPI up to September 1999

    Allows you to discount your capital gain

    Basic method of subtracting the cost base from the capital proceeds

    When to use the method

    Use for an asset owned for 12 months or more if it produces a better result than the discount method. Use only for assets acquired before 11.45am (by legal time in the ACT) on 21 September 1999.

    Use for an asset owned for 12 months or more if it produces a better result than the indexation method.

    Use when the indexation and discount methods do not apply (for example, if you have bought and sold an asset within 12 months).

    How to calculate your capital gain using the method

    Apply the relevant indexation factor (see CPI table at appendix 2), then subtract the indexed cost base from the capital proceeds (see worked example for Val).

    Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage (see worked example for Val).

    Subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds (see worked example for Marie-Anne).

    Certain capital gains are excluded

    The CGT discount does not apply to capital gains from certain CGT events. The CGT discount does not apply to these CGT events:

    • D1 Creating contractual or other rights
    • D2 Granting an option
    • D3 Granting a right to income from mining
    • E9 Creating a trust over future property
    • F1 Granting a lease
    • F2 Granting a long-term lease
    • F5 Lessor receives payment for changing a lease
    • H2 Receipt for an event relating to a CGT asset
    • J2 Change in relation to replacement asset or improved asset after a rollover under Subdivision 152-E
    • J5 Failure to acquire replacement asset and to incur fourth element expenditure after a rollover under Subdivision 152-E
    • J6 Cost of acquisition of replacement asset or amount of fourth element expenditure, or both, not sufficient to cover disregarded capital gain.

    The full list of CGT events is shown at appendix 1.

    If you make a capital gain from a CGT event that creates a new asset - for example, receiving a payment for agreeing not to do something (entering into a restrictive covenant) - you cannot satisfy the 12-month ownership rule, so your CGT event does not qualify for the CGT discount.

    The CGT discount may be denied:

    • if the CGT event that gave rise to the capital gain occurred under an agreement that was made within 12 months of the acquisition of the asset
    • on the disposal of certain shares or trust interests in non-widely held companies and trusts - that is, those with fewer than 300 members, or
    • if an arrangement was entered into for the purposes of claiming the CGT discount under which an 'income' asset was converted into a 'capital' asset (conversion of income to capital) (Part IVA of the Income Tax Assessment Act 1936).

    If the 'home first used to produce income' rule applies and the period between when you first used the dwelling to produce income and the CGT event happening is not at least 12 months, the discount method is not available.

    Discount percentage

    The discount percentage is the percentage by which you reduce your capital gain. You can reduce the capital gain only after you have applied all the capital losses for the income year and any unapplied net capital losses from earlier years.

    The discount percentage is 50% for individuals and trusts, and 331/3% for complying superannuation entities and eligible life insurance companies.

    Last modified: 06 Oct 2009QC 27893