• Choosing the indexation or discount method

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    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 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 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. For information about when and how, see Choices.

    Example 11: Comparison of discount and indexation methods

    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 (that is, $7,000 minus $5,000). If he used the discount method, his net capital gain would be $2,500 (that is, $10,000 minus $5,000, multiplied by 50%).

    Example 12 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 12: Capital gains on shares where you also have capital losses

    Clare sold a parcel of 500 shares in March 2010 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. There was no brokerage on the sale. Clare had no other capital gains or capital losses in 2009-10, 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 indexation method

    Using discount method

    Capital proceeds

    $12,500

    $12,500

    Cost base (acquisition cost x indexation factor)

    *$8,070

    $7,500

    Capital gain

    $4,430

    $5,000

    less capital losses

    $3,500

    $3,500

     

    $930

    $1,500

    CGT discount

    Nil

    $750

    Net capital gain

    $930

    $750

    *$7,500 x 1.076 (indexation factor is 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** 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 1.076)

    $6,375

    Capital gain

    $3,500

    less capital losses

    $3,500

    Capital gain/(loss)

    Nil

     

    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

    nil

     

    $1,050

    CGT discount

    $525

    Net capital gain

    $525

    ** 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).

    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 13 below and in the completed Capital gain or capital loss worksheet (PDF, 56KB).

    Example 13: 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 2009 (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 1.164

    (indexation factor is 123.4   106.0 = 1.164)

     

     

    $17,460

    Balance x indexation factor

    $135,000 x 1.164

     

    $157,140

    Stamp duty x indexation factor

    $5,000 x 1.158

    (indexation factor is 123.4   106.6 = 1.158)

     

     

    $5,790

    Solicitors fees for purchase of property x indexation factor

    $2,000 x 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 as follows:

    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 2009-10 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 as follows:

    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 CGT 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 write 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 (PDF, 56KB) shows how Val might complete the CGT summary worksheet for 2009-10 tax returns (PDF, 210KB) using both methods.

    Last modified: 10 Sep 2010QC 28058