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  • 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 AEST on 21 September 1999
    • you acquired the asset at least 12 months before the CGT event
    • 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.

    You can use the discount method to work out your capital gain from the property if you:

    • acquire a property and construct a building or make improvements to it that are not separate assets (see Separate assets)
    • 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).

    Example 10: Discount method

    Sally acquired a CGT asset on 2 February 2019. She is entitled to apply the CGT discount if a CGT event happened to that asset on or after 3 February 2020.

    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

    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 AEST 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.

    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 2019–20 and any unapplied net capital losses from earlier years.

    The discount percentage is 50% for individuals and trusts, and 33⅓% for complying superannuation entities and eligible life insurance companies.

    If you are:

    • an individual
    • a beneficiary of a trust, or
    • a partner in a partnership

    and

    • a foreign or temporary resident, or
    • an Australian resident with a period of foreign residency

    you may no longer receive the full 50% discount on capital gains made after 8 May 2012 on taxable Australian property.

    See also:

    Choosing the indexation or discount method

    For assets you acquired before 11.45am AEST 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
    • 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.

    See also:

    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%).

    End of example

    Example 12 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 2020 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 2019–20, 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:

    Comparison of indexation and discount methods

    Calculation element

    Using indexation method

    Using discount method

    Capital proceeds

    $12,500

    $12,500

    Cost base (acquisition cost × indexation factor)

    $8,077 (see note 1)

    $7,500

    Capital gain

    $4,423

    $5,000

    less capital losses

    $3,500

    $3,500

    Subtotal

    $923

    $1,500

    CGT discount

    Nil

    $750

    Net capital gain

    $923

    $750

    Note 1: $7,500 × 1.077 (indexation factor is 68.7 ÷ 63.8 = 1.077)

    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 below) shares, and the discount method to the remaining 105 shares. She works out her net capital gain as follows:

    Indexation method (395 shares)

    Capital proceeds ($25 each)

    $9,875

    Cost base (395 × $15 × 1.077 each)

    $6,381

    Capital gain

    $3,494

    less capital losses

    $3,500

    Capital gain/(loss)

    $(6)

    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

    $6

    -

    $1,044

    CGT 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 ($4,424 ÷ 500 = 8.85) and divided the capital loss by this amount ($3,500 ÷ 8.85 = 395).

    End of example

    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 example 13 and in the completed Capital gain or capital loss worksheet (PDF 94KB)This link will download a file  

    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 2019 (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 × indexation factor
    $15,000 × 1.164
    (indexation factor is 68.7 ÷ 59.0 = 1.164)

     

    $17,460

    Balance × indexation factor
    $135,000 × 1.164


    $157,140

    Stamp duty × indexation factor
    $5,000 × 1.159
    (indexation factor is 68.7 ÷ 59.3 = 1.159)

     

    $5,795

    Solicitor's fees for purchase of property x indexation factor
    $2,000 × 1.159


    $2,318

    Solicitor's fees for sale of property
    (indexation does not apply)

    $1,500

    Agent's commission
    (indexation does not apply)


    $4,000

    Cost base (total)

    $188,213

    Val works out her capital gain as follows:

    Capital proceeds

    $350,000

    less cost base

    $188,213

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

    $161,787

    Assuming Val has not made any other capital losses or capital gains in 2019–20 and does not have any unapplied net capital losses from earlier years, her net capital gain using the indexation method is $161,787.

    Val’s capital gain calculated using the 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

    $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 Capital gain or capital loss worksheet (PDF 94KB)This link will download a file shows how Val might complete the worksheet using both methods.

    End of example
      Last modified: 28 May 2020QC 62635