The three methods of calculating capital gain are explained and compared in following the table.

The other method is the method you use when neither the indexation nor discount method applies. It applies, for example, to any CGT asset you have bought and sold within 12 months. As a general rule, to calculate your capital gain using the 'other' method, you subtract your cost base from your capital proceeds.

You can use the indexation method to calculate your capital gain for assets you acquired before 21 September 1999 and owned for 12 months or more. This method allows you to increase the amount of your cost base (and reduce your capital gain) by an inflation factor based on increases in the Consumer Price Index (CPI) up to September 1999, see Appendix 2 of Guide to capital gains tax.

You can use the discount method to calculate your capital gain for any asset that you have owned for 12 months or more. If you use this method you do not apply the indexation factor to the cost base but you may be able to reduce your capital gain by the CGT discount (50 per cent for individuals and trusts, 33 1/3 per cent for complying superannuation funds).

Generally, the discount method does not apply to companies.

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 use the method that gives you the better result.

There is only one way to work out your capital loss.

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 event, a cost base is not relevant. In these cases, the particular CGT event explains the amounts to use.

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 11.45 am on 21 September 1999, and
• you owned the asset for 12 months or more.

This means that at the time of the CGT event, you can increase each element of the cost base (other than the third element—non-capital costs of ownership) by an indexation factor.

As indexation was frozen as at 30 September 1999, you can index your cost base only up to the September 1999 quarter.

There are some exceptions to the requirement that you must have owned the 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 period your spouse owned the asset and the period you have owned the asset are in total equal to or greater than 12 months.

The indexation factor is worked out using the CPI at Appendix 2 of Guide to capital gains tax.

For CGT events that occurred after 30 June 1999, the indexation factor is the CPI for the September 1999 quarter (123.4) divided by the CPI for the quarter in which you incurred costs relating to the asset.

If the CGT event happened on or after 21 September 1999, you use this formula:

• Indexation factor = CPI for quarter ending 30.9.99 ÷ CPI for quarter in which expenditure was incurred.

If the CGT event happened before 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.

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 fund
• a CGT event happens in relation to an asset you own
• the CGT event happened after 11.45 am 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.

In determining whether you acquired the CGT asset at least 12 months before the CGT event, both the day of acquisition and the day of the CGT event are excluded.

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 a result of a marriage breakdown, you will satisfy the 12-month requirement if the period your spouse owned the asset and the period you have owned the asset are in total equal to or greater than 12 months, or
• if a CGT asset is compulsorily acquired, lost or destroyed and you acquire a roll-over 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.

More information about the three methods of calculating capital gain, including examples, can be found in the Guide to capital gains tax. The Capital gain or capital loss worksheet, which is included in the guide, also shows the three methods of calculating a capital gain.

Calculating the proceeds from a depreciating asset

There are special rules for calculating the proceeds from a depreciating asset. A depreciating asset is a tangible asset (other than land or trading stock) that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Certain intangible assets are also depreciating assets.

The uniform capital allowance system (UCA)

The UCA applies from 1 July 2001. Unlike the previous capital allowance regime for plant which operated prior to 1 July 2001, a capital gain or capital loss from the disposal of a depreciating asset will only arise to the extent that a depreciating asset has been used for a non-taxable purpose (for example, used privately).

A capital gain or capital loss is calculated using the UCA concepts of cost and termination value and not those found in the CGT provisions (capital proceeds and cost base).

A CGT event (CGT event K7) happens if:

• a balancing adjustment event occurs for a depreciating asset a taxpayer held, and
• at some time during the period the depreciating asset was held it was used for a non-taxable purpose.

A balancing adjustment event most commonly occurs for a depreciating asset when a taxpayer stops holding it (if it is sold, lost or destroyed) or stops using it.

Calculating a capital gain or capital loss for a depreciating asset that is not a pooled asset

You make a capital gain if a depreciating asset's termination value is more than its cost. A capital gain from a depreciating asset is calculated as follows:

(Termination value – cost) x sum of reductions ÷ total decline

Sum of reductions is the sum of the reductions in your deductions for the asset’s decline in value that is attributable to your use of the asset, or your having it installed ready for use, for a non-taxable purpose. Total decline is the decline in value of the depreciating asset since you started to hold it.

You make a capital loss if the depreciating asset’s cost is more than its termination value. A capital loss from a depreciating asset is calculated as follows:

• (Cost – termination value) x sum of reductions ÷ total decline

Calculating a capital gain or capital loss for a depreciating asset in a low-value pool

There are separate rules for depreciating assets that have been allocated to a low-value pool.

You make a capital gain if the depreciating asset’s termination value is more than its cost. The amount of the capital gain is calculated as:

• (Termination value – cost) x (1 – taxable use fraction)

Taxable use fraction is the percentage of use of an asset that will be for a taxable purpose, expressed as a fraction that you estimated for the asset when you allocated it to the pool.

You make a capital loss if the depreciating asset’s cost is more than its termination value. The amount of the capital loss is calculated as:

• (Cost – termination value) x (1 – taxable use fraction)

For a full understanding of capital gains calculations and to learn about concessions and exemptions that may apply, see the Guide to capital gains tax.