• The 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

    Use the discount method to calculate your capital gain if:

    • you are an individual, a trust or a complying superannuation entity
    • a CGT event happens to an asset you own
    • the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999
    • you acquired the asset at least 12 months before the CGT event, and
    • you did not choose to use the indexation method.

    Generally, the discount method does not apply to companies, although it can apply to a limited number of capital gains made by life insurance companies.

    In determining whether you acquired the CGT asset at least 12 months before the CGT event, you exclude both the day of acquisition and the day of the CGT event.

    Note that if you:

    • acquire a property and construct a building or make improvements to it that are not separate assets (see Separate assets), and
    • owned the property for at least 12 months (even if you did not construct the new building or improvements more than 12 months before the CGT event happened)
    • you can use the discount method to work out your capital gain from the property.

    Example 10: Discount method

    Sally acquired a CGT asset on 2 February 2013. She is entitled to apply the CGT discount if a CGT event happened to that asset on or after 3 February 2014.

    End of example

    In certain circumstances, you may be eligible for the CGT discount even if you have not owned the asset for at least 12 months. For example if:

    • you acquire a CGT asset as a legal personal representative or as a beneficiary of a deceased estate. The 12-month requirement is satisfied if the asset was acquired by the deceased
      • before 20 September 1985 and you disposed of it 12 months or more after they died, or
      • on or after 20 September 1985 and you disposed of it 12 months or more after they acquired it
       
    • you acquired a CGT asset as the result of a marriage or relationship breakdown and rollover applies. You will satisfy the 12-month requirement if the combined period your spouse and you owned the asset was more than 12 months
    • a CGT asset was compulsorily acquired, lost or destroyed and you acquired a rollover replacement asset, you will satisfy the 12-month requirement for the replacement asset if the period of ownership of the original asset and the replacement asset was at least 12 months.
    Table 2: Capital gain calculation methods

     

    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 13

    Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage, see worked example 13.

    Subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds, see worked example 9.

     The law has been amended to remove or reduce the 50% discount on capital gains made after 8 May 2012 by non-resident individuals on taxable Australian property. For more information see Capital gains tax (CGT) discount for foreign resident individuals.

    In our examples, we have assumed that the taxpayer is entitled to a 50% discount percentage.

    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 for 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
    • K10 Forex realisation 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, that is, 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
    • 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 33 1/3% for complying superannuation entities and eligible life insurance companies.

    The law has been amended to remove or reduce the 50% discount on capital gains made after 8 May 2012 by non-resident individuals on taxable Australian property. For more information see Capital gains tax (CGT) discount for foreign resident individuals.

    In our examples, we have assumed that the taxpayer is entitled to a 50% discount percentage.

    Last modified: 01 Sep 2014QC 39804