• The indexation method of calculating your capital gain

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    Eligibility

    You can use the indexation method to calculate your capital gain if:

    • a capital gains tax (CGT) event happened to an asset you acquired before 11.45am (by legal time in the ACT) on 21 September 1999, and
    • you owned the asset for 12 months or more.

    If you're not a company, you meet the two conditions above and you want to use the indexation method, you must choose to do so, otherwise the discount method will apply. The way you prepare your tax return is sufficient evidence of the choice.

    If you're a company (other than a listed investment company) and the capital gain meets the above conditions, you must use the indexation method to calculate the capital gain.

    There are some exceptions to the requirement that you must have owned an asset for at least 12 months for indexation to apply. For example, you can use the indexation method if you acquire a CGT asset:

    • as a legal personal representative or beneficiary of a deceased estate. The 12-month requirement is satisfied if the deceased acquired the asset 12 months or more before you disposed of it, or
    • as the result of a marriage or relationship breakdown. You satisfy the 12-month requirement if the combined period your spouse and you owned the asset is more than 12 months.

    Applying the indexation method

    Under the indexation method you increase each amount included in an element of the cost base (other than those in the third element, 'costs of owning the asset') by an indexation factor.

    The indexation factor is worked out using the consumer price index (CPI).

    If the CGT event happened on or after 11.45am (by legal time in the ACT) on 21 September 1999, you can only index the elements of your cost base up to 30 September 1999. You use this formula:

    'Indexation factor' equals 'CPI for quarter ending 30 September 1999' divided by 'CPI for quarter in which expenditure was incurred'

    If the CGT event happened before 11.45am (by legal time in the ACT) on 21 September 1999, you use this formula:

    'Indexation factor' equals 'CPI for quarter when CGT event happened' divided by 'CPI for quarter in which expenditure was incurred'

    Work out the indexation factor to three decimal places, rounding up if the fourth decimal place is five or more (for example, 1.4125 would become 1.413).

    For most assets, you index expenditure from the date you incur it, even if you don't pay some of the expenditure until later. However, there is an exception for partly paid shares or units acquired on or after 16 August 1989. If the company or trust later makes a call on the shares or units, you use the CPI for the quarter in which you made that later payment.

    Next steps:

    • You can use the Capital gain or capital loss worksheet to work out and compare your outcomes when using the discount and indexation methods, and to work out your capital gain or loss using the 'other' method.

    See also:

    Last modified: 17 Jul 2017QC 17158