• Choosing the indexation or discount methods

    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 you 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.

    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) x 50%].

    End of example

    The example below shows that applying one method to work out your capital gains on a whole parcel of shares you acquired before 21 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: Capital gains on shares where you also have capital losses

    Clare sold a parcel of 500 shares in March 2016 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 costs. There were no brokerage costs on the sale of her shares. Clare had no other capital gains or capital losses in 2015-16, 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 CGT discount method

    Using indexation method

    Capital proceeds

    $12,500

    $12,500

    less Cost base

    $7,500

    *$8,077

    Capital gain

    $5,000

    $4,423

    less capital losses

    $3,500

    $3,500

     

    $1,500

    $923

    50% discount

    $750

    Nil

    Net capital gain

    $750

    $923

    * $7,500 x (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** 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 1.077) $6,381

    Capital gain

    $3,494

    less capital losses

    $3,500

    Capital gain/(loss)

    6

    CGT 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

    6

     

    $1,044

    50% discount

    $522

    Net capital gain

    $522

    ** To calculate this, Clare worked out the capital gain made on each share using the indexation method ($4,423 ÷ 500 = 8.85) and divided the capital loss by this amount ($3,500 ÷ 8.85 = 395).

    End of example

    It is probably best to calculate your capital gain using both methods to find out which gives you the better result. This is shown below in the worked example for Val.

    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 solicitor’s fees of $2,000, which she paid as part of the settlement process.

    She sold the property on 15 October 2015 (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
    $15,000 x (68.7 ÷ 59.0 = 1.164)

    =

    $17,460

    Balance x indexation factor
    $135,000 x (68.7 ÷ 59.0 = 1.164)

    =

    $157,140

    Stamp duty x indexation factor
    $5,000 x (68.7 ÷ 59.3 = 1.159)

    =

    $5,795

    Solicitors’ fees for purchase of property x indexation factor
    $2,000 x (68.7 ÷ 59.3 = 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

     

    $161,787

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

    Assuming Val has not made any other capital losses or capital gains in the 2015-16 income year 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

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

     

    $187,500

    less 50% 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 show the amount worked out using the discount method on her tax return rather than the amount worked out using the indexation method.

    The completed worksheet example shows how Val might complete the Capital gain or capital loss worksheet (PDF, 57KB) using both methods.

    End of example

      

    Example: Shares purchased and given away more than 12 months later

    In May 1999, Andrew bought 1,200 units in Share Trust for $1,275. This amount included brokerage fees. He gave the units to his brother, in August 2014. A CGT event happens when Andrew makes the gift. At the time of this CGT event, the units were worth $1,595. As the market value of the units is greater than their cost base, Andrew has made a capital gain.

    As Andrew bought the units before 21 September 1999 and he owned them for more than 12 months, he can use the indexation or discount method to calculate his capital gain, whichever gives him the better result.

    Indexation method

    If Andrew calculates his capital gain using the indexation method, he indexes the cost of his units and the incidental costs of buying them as follows:

    The indexation factor is:

    CPI for September 1999 quarter
    CPI for June 1999 quarter

    =

    68.7
    68.1

    =

    1.009

    His indexed cost base is:

    His cost ($1,275) x The indexation factor (1.009) = $1,286.48

    So his capital gain is:

    Capital proceeds

    $1,595.00

    Less indexed cost base

    $1,286.48

    Capital gain

    $308.52

    Rounded down

    $308.00

    Discount method

    If Andrew uses the discount method, his capital gain is calculated as:

    Capital proceeds

    $1,595

    Less cost base

    $1,275

    Capital gain

    $320

    Less discount *

    $160

    Capital gain

    $160

    * Andrew does not have any capital losses. If he did, he would deduct any capital losses before applying the discount.

    Andrew chooses the discount method because it gives him a smaller capital gain.

    End of example

    Note: If, during the period of owning the units, Andrew had received a non-assessable payment from the fund, his cost base may have been reduced and the capital gain may have been greater.

    See also:

    Using multiple methods

    In the examples following, Tony uses the indexation method, the discount method, and the 'other' method, to calculate his capital gain so he can decide which method gives him the best result. This example shows you how to complete the capital gain or capital loss worksheet to calculate your capital gain when you acquire or dispose of shares.

    Remember that if you bought and sold your shares within 12 months, you must use the ‘other’ method to calculate your capital gain. If you owned your shares for 12 months or more, you may be able to use either the discount method or the indexation method, whichever gives you the better result.

    Because each share in a parcel of shares is a separate CGT asset, you can use different methods to work out the amount of any capital gain for shares within a parcel. This may be to your advantage if you have capital losses to apply. See the example of Clare.

    Example: Using all three methods to calculate a capital gain

    On 1 July 1993, Tony bought 10,000 shares in Kimbin Ltd for $2 each. He paid a stockbroker’s fee of $250 and stamp duty of $50.

    On 1 July 2014, Kimbin Ltd offered each of its shareholders one right for each four shares owned to acquire shares in the company for $1.80 each. The market value of the shares at the time was $2.50.

    On 1 August 2015, Tony exercised all rights and paid $1.80 per share.

    On 1 December 2015, Tony sold all his shares in Kimbin Ltd for $3.00 each. He incurred a stockbroker’s fee of $500 and stamp duty of $50.

    Note: Separate records

    Tony has two parcels of shares – those he acquired on 1 July 1993 and those he acquired at the time he exercised all rights, 1 August 2015. He needs to keep separate records for each parcel and apportion the stockbroker’s fee of $500 and stamp duty of $50.

    The completed Capital gain or capital loss worksheet (PDF, 77KB) shows how Tony can evaluate which method gives him the best result.

    He uses the 'other' method for the 2,500 shares he owned for less than 12 months, as he has no choice:

    Capital proceeds

    $7,500

    less Cost base

    $4,610

    Capital gain

    $2,890

    For the 10,000 shares he has owned for 12 months or more, his capital gain using the indexation method would be:

    Capital proceeds

    $30,000

    less Cost base

    $23,257

    Capital gain

    $6,743

    This means his net capital gain would be:

    $2,890

    +

    $6,743

    =

    $9,633

    ('other' method)

    (indexation method)

    (net capital gain)

    If Tony uses the discount method instead (assuming he has no capital losses), his capital gain would be:

    Capital proceeds

    $30,000

    less Cost base

    $20,740

    Capital gain

    $9,260

    He applies the CGT discount of 50%:

    $9,260 x 50% = $4,630

    This means Tony’s net capital gain would be:

    $2,890

    +

    $4,630

    =

    $7,520

    ('other' method)

    (discount method)

    (net capital gain)

    In this case, Tony would choose the discount method, rather than the indexation method, as it gives him the better result – that is, a lower net capital gain.

    End of example

    See also:

    For details of different ways of calculating a capital gain, see:

    For help applying this to your own situation, phone 13 28 61

      Last modified: 21 Jun 2016QC 17166