• # Choosing the indexation or discount methods

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 discount method to calculate your capital gain.

The best option for you depends on a range of factors: the type of asset you own, the dates you owned it, past rates of inflation and whether you have any capital losses available.

You can use the Capital gain or capital loss worksheet to work out and compare your capital gain or loss for either or both of these methods (and to work out your capital gain or loss for the 'other' method).

## Comparing methods

It's usually best to calculate your capital gain using both methods to find out which gives you the better result. This is shown in the worked examples below.

Example: Choosing the best method – property

Val bought an investment 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 2016 (the day the contracts were exchanged) for \$600,000. She incurred costs of \$1,500 in solicitor’s fees and \$15,000 in agent’s commission.

Indexation method

The indexation factor is the CPI for the September 1999 quarter divided by the CPI for the quarter in which the expenditure was incurred:

• for the June 1991 quarter this is 68.7 ÷ 59.0 = 1.164
• for the September 1991 quarter this is 68.7 ÷ 59.3 = 1.159.

Val works out her indexed cost base as follows:

 Deposit × indexation factor \$15,000 × 1.164 = \$17,460 Balance × indexation factor \$135,000 × 1.164 = \$157,140 Stamp duty × indexation factor \$5,000 × 1.159 = \$5,795 Solicitors’ fees for purchase of property × indexation factor \$2,000 × 1.159 = \$2,318 Solicitor’s fees for sale of property (indexation does not apply) \$1,500 Agent’s commission for sale of property (indexation does not apply) \$15,000 Cost base (total) \$199,213

Val works out her capital gain as follows:

 Capital proceeds \$600,000 less cost base \$199,213 Capital gain \$400,787

(Val's total current year capital gain using this method is \$400,787.)

Assuming Val has not made any other capital losses or capital gains in the 2016–17 income year and does not have any unapplied net capital losses from earlier years, her net capital gain using the indexation method is \$400,787.

Discount method

 Deposit \$15,000 Balance \$135,000 Stamp duty \$5,000 Solicitor’s fees for purchase of property \$2,000 Solicitor’s fees for sale of property \$1,500 Agent’s commission \$15,000 Cost base (total) \$173,500

Val works out her capital gain as follows:

 Capital proceeds \$600,000 less cost base \$173,500 Discount capital gain (Val's total current year capital gain using this method) \$426,500 less 50% discount (as Val has no capital losses) \$213,250 Net capital gain \$213,250

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.

End of example

Example: Choosing the best method – units

In May 1999 Andrew bought 1,200 units in Share Trust for \$1,275. This amount included brokerage fees. He gave the units to his brother in August 2014. A CGT event happened when Andrew made the gift. At the time of this CGT event, the units were worth \$1,595. As the market value of the units was greater than their cost base, Andrew made a capital gain.

As Andrew bought the units before 21 September 1999 and owned them for more than 12 months, he can use the indexation or discount method to calculate his capital gain, whichever gives him the better result.

Indexation method

If Andrew calculates his capital gain using the indexation method, he indexes the cost of his units and the incidental costs of buying them as follows:

The indexation factor is the CPI for September 1999 quarter divided by the CPI for June 1999 quarter.

In this example, that is 68.7 ÷ 68.1 = 1.009

His indexed cost base is his cost (\$1,275) multiplied by the indexation factor (1.009), which is \$1,286.48.

So Andrew's capital gain is:

 Capital proceeds \$1,595.00 Less indexed cost base \$1,286.48 Capital gain \$308.52 Rounded down \$308.00

Discount method

If Andrew uses the discount method, his capital gain is calculated as:

 Capital proceeds \$1,595 Less cost base \$1,275 Capital gain \$320 Less discount \$160 Capital gain \$160

If Andrew had any capital losses he would deduct them before applying the discount.

Andrew chooses the discount method because it gives him a smaller capital gain.

If Andrew had received a non-assessable payment from the fund during the period he owned the units, his cost base may have been reduced and the capital gain may have been greater.

End of example

## Comparing methods where capital losses are available

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 you have available.

Example: Capital gain on property where you also have capital losses

Justin sells some land and has a \$10,000 capital gain under the discount method (before applying the 50% 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 after applying the discount).

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

## Using multiple methods where capital losses are available

The example below shows that applying one method to work out your capital gains on a whole parcel of shares you acquired before 21 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

In March 1995, Clare bought 500 shares at \$15 each for a total of \$7,500, including stamp duty and brokerage costs. She sold the shares in March 2017 at \$25 each for a total of \$12,500 (there were no brokerage costs on the sale of her shares). Clare had no other capital gains or capital losses in 2016–17, although she had \$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. To help decide, Clare works out her net capital gain under each method for the whole parcel of shares:

 Capital proceeds \$12,500 less cost base (see note 1) \$7,500 Capital gain \$5,000 less capital losses \$3,500 Gross capital gain \$1,500 50% discount \$750 Net capital gain \$750

Note 1: The cost base for the indexation method is worked out as follows:
\$7,500 × (68.7 ÷ 63.8 = 1.077)

 Capital proceeds \$12,500 less cost base (see note 1) \$8,077 Capital gain \$4,423 less capital losses \$3,500 Gross capital gain \$923 50% discount Nil Net capital gain \$923

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 (see note 2) and the discount method to the remaining 105. She works out her net capital gain as follows:

 Capital proceeds (\$25 each) \$9,875 Cost base (395 × \$15 × 1.077) \$6,381 Capital gain \$3,494 less capital losses \$3,500 Capital gain or (loss) \$6 (loss)
 Capital proceeds (\$25 each) \$2,625 Cost base (105 × \$15) \$1,575 Capital gain \$1,050 less any remaining capital losses \$6 Gross capital gain \$1,044 50% discount \$522 Net capital gain \$522

Note 2: To calculate this, Clare worked out the capital gain made on each share using the indexation method (\$4,423 ÷ 500 = 8.85) and divided the capital loss by this amount (\$3,500 ÷ 8.85 = 395).

End of example

## Using multiple methods where the available methods vary

If you buy and sell shares within 12 months, you must use the ‘other’ method to calculate your capital gain. If you own your shares for 12 months or more, you may be able to use either the discount method or the indexation method, whichever gives you the better result.

Example: Using all three methods to calculate a capital gain

On 1 July 1993 Tony bought 10,000 shares in Kimbin Ltd for \$2 each. He paid a stockbroker’s fee of \$250 and stamp duty of \$50.

On 1 July 2016 Kimbin Ltd offered each of its shareholders one right for each four shares owned to acquire shares in the company for \$1.80 each. The market value of the shares at the time was \$2.50.

On 1 August 2016, Tony exercised all rights and paid \$1.80 per share.

On 1 December 2016, Tony sold all his shares in Kimbin Ltd for \$3.00 each. He incurred a stockbroker’s fee of \$500 and stamp duty of \$50.

Tony had two parcels of shares – those he acquired on 1 July 1993 and those he acquired at the time he exercised all rights, 1 August 2016. He needs to keep separate records for each parcel and apportion the stockbroker’s fee of \$500 and stamp duty of \$50.

He uses the 'other' method for the 2,500 shares he owned for less than 12 months, as he has no choice:

 Capital proceeds \$7,500 less cost base \$4,610 Capital gain \$2,890

For the 10,000 shares he owned for 12 months or more, his capital gain using the indexation method would be:

 Capital proceeds \$30,000 less indexed cost base \$23,265 Capital gain \$6,735

This means his net capital gain would be:

 'Other' method \$2,890 plus indexation method \$6,735 Net capital gain \$9,625

If Tony uses the discount method instead (assuming he has no capital losses), his capital gain would be:

 Capital proceeds \$30,000 less cost base \$20,740 Capital gain \$9,260

He applies the CGT discount of 50%:

\$9,260 × 50% = \$4,630

This means Tony’s net capital gain would be:

 'Other' method \$2,890 plus discount method \$4,630 Net capital gain \$7,520

In this case, Tony would choose the discount method, rather than the indexation method, as it gives him the better result – that is, a lower net capital gain.

End of example