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  • Chapter 2 - How to work out your capital gain or capital loss

    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

    This chapter explains how to work out each capital gain or capital loss you made during the year.

    It does not explain how to work out your net capital gain or net capital losses carried forward to later income years. If you are completing a tax return for an individual and want more information on how to calculate your net capital gain for the year or net capital losses carried forward to later income years (including how to deduct any unapplied net capital losses from earlier years), see part B of this guide. For more information about companies, trusts and funds or about completing the CGT summary worksheet (PDF, 243KB)This link will download a file, see part C of this guide.

    There are three methods that you can use to work out your capital gain. There is only one way to work out your capital loss.

    The Capital gain or capital loss worksheet (PDF, 87KB)This link will download a file shows the three methods of calculating a capital gain: the indexation method, the discount method and the 'other' method. You are not obliged to use this worksheet but you may find it helps you calculate your capital gain or capital loss for each CGT event.

    New terms

    We may use some terms that are new to you. These words are explained in Definitions. Generally they are also explained in more detail in the section where they first appear.

    Three methods of calculating capital gain

    The three methods of calculating capital gains are summarised and compared in the table Capital gain calculation methods. They are explained in more detail in the following pages. In some cases you may be able to choose either the discount method or the indexation method to calculate your capital gain. In this case you use the method that gives you the better result.

    The 'other' method

    This is the simplest of the three methods. You must use the 'other' method to calculate your capital gain if you have bought and sold your asset within 12 months or generally for CGT events that do not involve an asset. In these cases, the indexation and discount methods do not apply.

    Generally, to use the 'other' method, you simply subtract your cost base (what the asset cost you) from your capital proceeds (how much you sold it for). The amount of proceeds left is your capital gain. For some types of CGT events, a cost base is not relevant. In these cases, the particular CGT event explains the amounts to use.

    Example: Calculating a capital gain using the 'other' method

    Marie-Anne bought a property for $250,000 under a contract dated 24 June 2004. The contract provided for the payment of a deposit of $25,000 on that date, with the balance of $225,000 to be paid on settlement on 5 August 2004.

    Marie-Anne paid stamp duty of $5,000 on 20 July 2004. On 5 August 2004, she received an account for solicitors fees of $2,000 which she paid as part of the settlement process.

    Contracts for the sale of the property for $315,000 were exchanged on 15 October 2004. Marie-Anne incurred costs of $1,500 in solicitors fees and $4,000 in agents commission.

    As she bought and sold her property within 12 months, Marie-Anne must use the 'other' method to calculate her capital gain.

    Deposit

    $25,000

    Balance

    $225,000

    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)

    $262,500

    Marie-Anne works out her capital gain as follows:

    Capital proceeds

    $315,000

    less cost base

    $262,500

    Capital gain calculated using the 'other' method

    $52,500

    Assuming Marie-Anne has not made any other capital losses or capital gains in the 2004-05 income year and does not have any unapplied net capital losses from earlier years, the net capital gain to be included at item 17 on her tax return (supplementary section) is $52,500 (item 9 if she uses the tax return for retirees).

    End of example

    The indexation method

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

    • a CGT event happens 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.

    Under this method, you increase each amount included in an element of the cost base (other than those in the third element - non-capital costs of ownership) by an indexation factor.

    The indexation factor is worked out using the consumer price index (CPI) at appendix 2.

    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 = (CPI for quarter ending 30.9.99 [123.4] ÷ 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 = (CPI for quarter when CGT event happened ÷ 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 most assets, you index expenditure from the date you incur it, even if you do not pay some of the expenditure until a later time. 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.

    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 a 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
    • if you acquired an asset as the result of a marriage breakdown. You will satisfy the 12-month requirement if the combined period your spouse and you owned the asset is more than 12 months.

    The discount method

    You can 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
    • you 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: CGT discount method

    Sally acquired a CGT asset on 2 February 2004. Sally is entitled to apply the CGT discount if a CGT event happens to that asset on or after 3 February 2005.

    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.
       
    • If you acquired an asset as the result of a marriage breakdown. You will satisfy the 12 month requirement if the combined period your spouse and you owned the asset is more than 12 months.
    • If a CGT asset is compulsorily acquired, lost or destroyed and you acquire 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 is at least 12 months.
    Certain capital gains are excluded

    The CGT discount does not apply to capital gains from certain CGT events. The full list of CGT events is shown in the summary at appendix 1. 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
    • n H2 Receipt for an event relating to a CGT asset
    • J2 Change in status of a CGT asset that was a replacement asset in a rollover under Subdivision 152-E
    • J3 A change happens in circumstances where a share in a company or an interest in a trust was a replacement asset in a rollover under Subdivision 152-E.

    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 CGT 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 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.

    Choosing the indexation or discount method

    For assets you 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 to 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.

    Example

    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%].

    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 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 2005 for $12,500 - that is, for $25 each. She had acquired the shares in March 1995 for $7,500 - that is, for $15 each. There were no brokerage costs on either purchase or sale. Clare had no other capital gains or capital losses in 2004-05, although she has $3,500 net capital losses carried forward from previous years.

    Because Clare owned the shares for more than 12 months she can use the CGT 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:

    Calculation element

    Using CGT discount method

    Using indexation method

    Capital proceeds

    $12,500

    $12,500

    Cost base

    $7,500

    $8,070
    (see Note 1)

    Capital gain

    $5,000

    $4,430

    less capital losses

    $3,500

    $3,500

    Subtotal

    $1,500

    $930

    50% discount

    $750

    Nil

    Net capital gain

    $750

    $930

    Note 1: $7,500 × (123.4 ÷ 114.7 = 1.076)

    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 (see Note 2) 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 × $15 × 1.076)

    $6,375

    Capital gain

    $3,500

    less capital losses

    $3,500

    Capital gain/(loss)

    nil

    CGT discount method (105 shares)

    Capital proceeds ($25 each)

    $2,625

    Cost base (105 × $15)

    $1,575

    Capital gain

    $1,050

    less any remaining capital losses

    nil

    Subtotal

    $1,050

    50% discount

    $525

    Net capital gain

    $525

     

    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 and the completed Capital gain or capital loss worksheet (PDF, 84KB).This link will download a file

    Note 2: To calculate this, Clare worked out the capital gain made on each share using the indexation method ($4,430 ÷ 500 = 8.86) and divided the capital loss by this amount ($3,500 ÷ 8.86 = 395).

    End of example

    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 2004 (the day the contracts were exchanged) for $350,000. 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 × indexation factor

    $15,000 × (123.4 ÷ 106.0 = 1.164)

    $17,460

    Balance × indexation factor

    $135,000 × (123.4 ÷ 106.0 = 1.164)

    $157,140

    Stamp duty × indexation factor

    $5,000 × (123.4 ÷ 106.6 = 1.158)

    $5,790

    Solicitors fees for purchase of property × indexation factor

    $2,000 × (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

    Capital proceeds

    $350,000

    less cost base

    $188,206

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

    $161,794

    Assuming Val has not made any other capital losses or capital gains in the 2004-05 income year and does not have any unapplied net capital losses from earlier years, her net capital gain using the indexation method is $161,794.

    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

    Capital proceeds

    $350,000

    less cost base

    $162,500

    Capital gain before applying discount
    (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 worksheet example (PDF, 83KB)This link will download a file shows how Val might complete the Capital gain or capital loss worksheet (PDF, 84KB)This link will download a file using both methods.

    End of example

    Capital gain calculation methods

    Method type

    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)

    How to calculate a capital loss

    Generally, you make a capital loss if your reduced cost base is greater than your capital proceeds. The excess is your capital loss.

    Example

    Antonio acquired a new income-producing asset on 28 September 1999 for $100,000. He sold it for $90,000 in November 2004. During the period he owned it, he was allowed capital works deductions of $7,500. Antonio works out his capital loss as follows.

    Cost base

    $100,000

    less write-off deduction

    $7,500

    Reduced cost base

    $92,500

    less capital proceeds

    $90,000

    Capital loss

    $2,500

     

    End of example

    Example

    In July 1996, Chandra bought 800 shares at $3 per share. He incurred brokerage and stamp duty of $100. In December 2004, Chandra sold all 800 shares for $2.50 per share. He incurred brokerage of $75. He made a capital loss, calculated as follows.

    Calculation of reduced cost base

    Date expense incurred

    Description of expense

    Expense

    July 1996

    Purchase price

    $2,400

    July 1996

    Brokers fees and stamp duty

    $100

    December 2004

    Brokers fees

    $75

    -

    Reduced cost base

    $2,575

    Calculation of capital loss

    Reduced cost base

    $2,575

    Capital proceeds 800 × $2.50

    $2,000

    Capital loss

    $575

     

    End of example

    However, the reduced cost base is not relevant for some types of CGT events. In these cases, the particular CGT event explains the amounts to use (see appendix 1).

    Note: Reduced cost base – You cannot index a reduced cost base.

    Last modified: 09 Apr 2020QC 27596