CGT Indexation Method Australia 2026-27: When It Beats the 50% Discount
Short answer: The CGT indexation method is still available in 2026-27 for assets you bought before 21 September 1999 and held for at least 12 months. It lets you inflate each cost by CPI growth up to September 1999 (frozen at the September 1999 quarter’s CPI of 68.7) before working out your gain. It beats the 50% CGT discount only when inflation makes up more than half of your nominal gain — typically very old assets that grew slowly. For everything else, the discount wins. Here’s exactly how to work out which one suits you.
How the indexation method works
Indexation is the original way Australia taxed capital gains, before the 50% discount arrived on 21 September 1999. The idea is simple: you shouldn’t pay tax on the part of your gain that is just inflation. So you adjust (index) your cost base upward for inflation, and only pay tax on the real gain above that.
There is one catch that trips up almost everyone: indexation is frozen. You can only index for inflation up to 30 September 1999 — not a day later. If you bought an asset in 1990, you get nine years of CPI. If you bought it in 1997, you get barely two years of CPI. Everything after September 1999 simply doesn’t count.
The formula (per ATO’s guide to the indexation method) is:
Indexation factor = 68.7 ÷ CPI for the quarter you incurred the cost
68.7 is the CPI for the September 1999 quarter. Work the factor out to three decimal places, rounding up when the fourth decimal place is 5 or more. You then multiply each cost by its factor. And note: each cost can have a different factor — the CPI quarter you use is the quarter you incurred that cost, so brokerage, legal fees or a stamp duty bill paid in a different quarter from the purchase gets its own factor, taken from the ATO’s CPI table.
Eligibility: who can actually use indexation
| Rule | Detail |
|---|---|
| Acquisition date | Asset (and each cost you index) acquired before 11:45am ACT time, 21 September 1999. Costs incurred after that time can’t be indexed. |
| Holding period | Owned for 12 months or more before the CGT event. |
| Individuals | You may choose indexation. If you don’t actively choose it, the discount method applies by default. |
| Companies | You must use indexation when eligible — companies never get the 50% discount. |
| No discount combined | You can’t apply the 50% CGT discount as well — one method or the other. |
| Ownership costs excluded | Third-element costs (interest, rates, insurance, repairs) can go in your cost base, but can never be indexed (Div 114, ITAA 1997). |
| No loss creation | Indexation can’t create a capital loss or make an existing loss bigger. If the indexed cost base exceeds your proceeds, use the other method instead. |
The “companies must use it” rule is one people rarely know, and it matters: a company selling pre-1999 assets gets no choice at all. And the default rule catches individuals out — indexation is not automatic. You choose it in your tax return; silence means the discount method.
Indexation vs the 50% discount: the exact decision rule
Competitor articles usually stop at “compare both and pick the lower gain.” That’s correct, but you can predict the winner in about ten seconds with a simple rule:
Indexation beats the discount when inflation accounts for more than half of your nominal gain.
Why? The discount cuts your whole gain in half. Indexation removes only the inflation component. So indexation wins precisely when the inflation component is bigger than half the gain.
In practical terms, the test is: work out your indexation factor (68.7 ÷ your purchase-quarter CPI). Indexation wins if sale price ÷ cost base < (2 × factor) − 1. Or, in words, if your gain is smaller than twice the inflation uplift. The table below does it for the quarters most readers will need:
| Bought (September quarter) | CPI | Indexation factor | Indexation wins when your gain is less than… |
|---|---|---|---|
| 1985 | 39.7 | 1.730 | 146% of your cost |
| 1988 | 50.2 | 1.369 | 73.8% of your cost |
| 1990 | 57.5 | 1.195 | 39.0% of your cost |
| 1993 | 61.1 | 1.124 | 24.8% of your cost |
| 1995 | 65.5 | 1.049 | 9.8% of your cost |
| 1996 | 66.9 | 1.027 | 5.4% of your cost |
| 1997 | 66.6 | 1.032 | 6.4% of your cost |
| 1999 (before 21 Sept) | 68.7 | 1.000 | Never — indexation can’t beat the discount |
Read it like this: shares bought in 1990 only beat the discount if they’ve less than doubled in real-ish terms since then. Anything bought after about 1995? Indexation is almost decorative — the factor is so close to 1.0 that the discount wins by a landslide. This is why the 50% discount remains the right answer for nearly every eligible asset — but “nearly” is doing a lot of work, as the worked examples show.
Step-by-step calculation
Follow the ATO’s own order:
- List every eligible cost. The purchase price plus any cost-base amounts incurred before 21 September 1999 (deposit, stamp duty, brokerage, legal fees). Costs of ownership (interest, rates, insurance) stay unindexed — you add them after.
- Find the CPI for the quarter each cost was incurred using the ATO CPI table.
- Calculate each indexation factor: 68.7 ÷ that quarter’s CPI, to three decimal places (round up if the fourth decimal is 5+).
- Multiply each cost by its factor.
- Add up the indexed costs plus any unindexed ownership costs — that’s your indexed cost base.
- Subtract the indexed cost base from your capital proceeds. That’s your capital gain. No discount is applied on top.
Then do the same sum under the discount method, apply your marginal tax rate to the difference, and you’ve got your answer in dollars. Running the numbers through a capital gains tax calculator that applies the best method automatically is the fastest sanity check.
Worked example 1: shares bought 1996 — the discount crushes it
You bought $50,000 of shares in the September 1996 quarter (CPI 66.9) and sell them in February 2027 for $400,000. Assume you’re on a 30% marginal rate (2026-27 resident rates).
Indexation method:
- Factor = 68.7 ÷ 66.9 = 1.027
- Indexed cost base = $50,000 × 1.027 = $51,350
- Capital gain = $400,000 − $51,350 = $348,650
- Tax at 30% = $104,595
Discount method:
- Gain = $400,000 − $50,000 = $350,000
- Taxable gain = $350,000 ÷ 2 = $175,000
- Tax at 30% = $52,500
The discount wins by $52,095 in tax. The table above told us this in advance: a 1996 asset only beats the discount if its gain is under 5.4% of cost — these shares gained 700%. Indexation barely moved the needle because almost no indexable inflation happened between 1996 and 1999.
Worked example 2: when indexation actually wins
You bought $50,000 of shares in the September 1985 quarter (CPI 39.7) and sell in 2027 for $115,000. Same 30% marginal rate.
Indexation method:
- Factor = 68.7 ÷ 39.7 = 1.730
- Indexed cost base = $50,000 × 1.730 = $86,500
- Capital gain = $115,000 − $86,500 = $28,500
- Tax at 30% = $8,550
Discount method:
- Gain = $115,000 − $50,000 = $65,000
- Taxable gain = $65,000 ÷ 2 = $32,500
- Tax at 30% = $9,750
Indexation wins — $1,200 less tax on this sale. The gain was only 130% of cost, under the 146% threshold for a 1985 asset, and inflation (a 73% uplift of the cost base) made up more than half the nominal gain. This is the profile where indexation earns its keep: very old assets with modest growth. If you’re sitting on pre-1990s holdings that underperformed, don’t assume the discount is best — run both.
Common mistakes
- Using today’s CPI. The most frequent error. Indexation stops at the September 1999 quarter (68.7). A quarter-century of post-1999 inflation is irrelevant to this method.
- Trying it on post-September-1999 assets. Bought in 2005? Indexation isn’t available at all — it’s the discount (held 12+ months) or nothing.
- Indexing ownership costs. Interest, council rates, land tax and insurance can sit in your cost base, but Div 114 expressly excludes the third element from indexation.
- One factor for everything. Each cost element gets its own factor from the quarter it was incurred — the purchase, the stamp duty paid months later, the broker fee. They can differ.
- Creating a loss with indexation. If your indexed cost base ends up higher than the sale price, you can’t book the difference as a capital loss. Drop indexation and use the other method — your loss is then proceeds minus the unindexed cost base. (Losses, when genuine, can be carried forward.)
- Forgetting to choose. Individuals must actively elect indexation. If you do nothing, the discount method applies — which is usually fine, but on an eligible asset it’s your money to lose.
- Mixing it up with the 2027 reform. From 1 July 2027, a different indexation system replaces the discount for most gains — that one isn’t frozen. Don’t conflate the two (see our 2027 CGT reform guide).
Tips
- Always run both methods on any pre-September-1999 asset — it takes two minutes and the answer isn’t always the discount, especially for older, slower-growing holdings.
- Dig out the original records. You need the quarter each cost was incurred, not just the purchase date. Old contract dates, settlement statements and broker confirmations are gold here.
- Remember companies have no choice. If you’re selling through a company structure, indexation is mandatory when eligible — factor it into disposal planning early.
- Trust beneficiaries, take note. The trustee makes the indexation-vs-discount choice for the trust. One practical upside of indexation for beneficiaries: an indexed gain flows through at full value with no “gross-up” — the gross-up only applies to discounted trust gains you must double back up before applying your own losses. Confirm the mechanics with your accountant at distribution time.
- Watch the 1 July 2027 line. Sell before 1 July 2027 and the old rules — discount or frozen indexation, your choice — apply in full. After that date the new system takes over.
FAQ
Is the indexation method still available in 2026-27?
Yes. Nothing changes until 30 June 2027. If you dispose of an asset bought before 21 September 1999 (and held 12+ months) during the 2026-27 income year, you can choose between the 50% discount and the frozen indexation method, exactly as before.
Can companies use the indexation method?
They must, when eligible. Companies (other than listed investment companies) never get the 50% CGT discount, so for a pre-21-September-1999 asset held 12+ months, indexation is the only method available to them.
How does the 1 July 2027 CGT reform affect indexed assets?
For disposals before 1 July 2027, the current choice stands. From 1 July 2027, the 50% discount is replaced by a new, ongoing (not frozen) cost-base indexation system for individuals and trusts. The pre-1999 frozen method and the new system are separate mechanisms — our 2027 reform guide covers the transition in detail.
Can indexation create a capital loss?
No. Indexation can never create a capital loss or increase an existing one. If indexing pushes your cost base above your sale proceeds, don’t use it — calculate the gain or loss with the other method (proceeds minus unindexed cost base) instead.
Which CPI quarter do I use — the purchase quarter or something else?
The quarter in which you incurred each cost. For the purchase price that’s usually the purchase quarter, but costs paid later (a second stamp duty instalment, deferred brokerage) use their own quarter’s CPI from the ATO’s table.
Can I use indexation and the CGT discount together?
No — it’s one or the other, and for individuals the discount is the default. If you want indexation, you must choose it when you lodge. For a quick comparison, run your figures through the CGT calculator first.
Indexation is a niche tool, but on the right asset — bought decades ago, grown modestly — it quietly beats the famous 50% discount. The rule is worth taping to your wall: if inflation is more than half your gain, index; otherwise, discount. And with the 2027 reform making indexation the default method for everyone, understanding it now puts you ahead of the curve.
