The discount method
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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: Discount method
Sally acquired a CGT asset on 2 February 2005. She is entitled to apply the CGT discount if a CGT event happens to that asset on or after 3 February 2006.
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 a CGT asset as the result of a marriage breakdown and rollover applies (see chapter 8). 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 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 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.
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.
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 331/3% for complying superannuation entities and eligible life insurance companies.
Last modified: 06 Oct 2009QC 18504