What Is the CGT Indexation Method?

The indexation method is one of three ways to calculate a capital gain under Australian tax law. It adjusts the cost base of a CGT asset for inflation that occurred between acquisition and disposal.

The Australian Tax Office (ATO) publishes quarterly CPI index numbers that are used to calculate the indexed cost base. By multiplying the original cost base by the indexation factor, you effectively exclude the inflationary component of the gain from tax.

Indexation was introduced when CGT began in Australia on 20 September 1985. It was the primary method for reducing capital gains until it was frozen on 21 September 1999. After that date, the government replaced indexation with the 50% CGT discount for individuals.

Which Assets Qualify for Indexation?

The indexation method is available only for CGT assets acquired before 11:45am on 21 September 1999. If you acquired the asset after this time, you cannot use indexation at all.

Common assets that may qualify include:

Investment properties purchased before September 1999 — residential or commercial. Shares in Australian companies acquired before the cut-off date. Managed fund units purchased before 21 September 1999. Collectables and personal use assets acquired before that date (subject to the usual CGT rules for those asset types). Business assets including goodwill, plant and equipment, and intellectual property.

The indexation method does not apply to assets acquired after September 1999, even if they were acquired as replacement assets or received as gifts from a pre-1999 owner.

How to Calculate the Indexation Factor

The indexation factor is calculated using the following formula:

Indexation Factor = CPI for Quarter of Disposal ÷ CPI for Quarter of Acquisition

If you disposed of the asset in the December 2024 quarter and acquired it in the June 1995 quarter, you divide the CPI for December 2024 by the CPI for June 1995. The result is capped at 1.000 (the factor cannot be less than 1).

The ATO publishes a complete table of indexation factors in its CGT guidelines. You can find CPI index numbers on the Australian Bureau of Statistics (ABS) website.

Importantly, the CPI used is the quarterly CPI index number, not the annual rate. You need the specific index number for the quarters of acquisition and disposal.

Calculation Example — Indexation Method

Let us walk through a complete example to illustrate the indexation method.

Michael purchased a residential investment property in March 1998 for $250,000. He sells it in March 2025 for $680,000. He has holding costs (stamp duty, legal fees) of $15,000 at purchase and selling costs of $20,000.

Note: CPI index numbers used above are illustrative. Actual index numbers vary by quarter. Check the ATO or ABS for current CPI data.

In this example, the discount method produces a better result ($197,500 vs $262,500). The discount method generally wins for assets held for many years because the 50% reduction is more generous than the CPI indexation adjustment.

Indexation Method vs Discount Method

For assets acquired before September 1999 that are held for 12 months or more, you can choose between the indexation method and the discount method. You calculate your capital gain under both methods and select the one that gives the lower result.

Companies and super funds have different rules. Companies cannot use the 50% CGT discount at all — they must use the indexation method if eligible. Super funds get a one-third discount (33.33%) instead of 50%.

When the Indexation Method Wins

The discount method is better in most situations. But there are specific cases where indexation produces a lower capital gain.

Short holding periods. If you acquired an asset just before September 1999 and sold it soon after (but still before the discount applies), indexation may reduce the gain while the discount would not yet be available. However, you need at least 12 months of holding for the discount, so post-2000 disposals of pre-1999 assets almost always qualify for discount.

Low inflation periods. In times of very high inflation, the indexation factor could exceed 2.0, effectively more than doubling the cost base. But historically, the discount method has still outperformed indexation because a 50% reduction on the nominal gain is larger than the CPI adjustment.

Company taxpayers. Since companies cannot use the discount method, the indexation method is the only option for reducing CGT on pre-1999 assets. Companies should always calculate the indexation-adjusted gain.

How to Report Indexation Method in Your Tax Return

Reporting a capital gain calculated under the indexation method is straightforward. You include the gain in your tax return at the relevant capital gains item.

For individuals, you report the indexed capital gain on the Capital Gains schedule attached to your annual tax return. Mark the method used as "Indexation Method" in the appropriate box. You do not apply the 50% discount on top of the indexed gain — the indexation adjustment is your only reduction.

The ATO provides a worksheet to help calculate the indexed cost base. Keep all records of the acquisition date, cost base components, CPI index numbers used, and disposal proceeds. If the ATO reviews your return, you need to substantiate the indexation calculation.

Use our income tax calculator to see how your capital gain affects your overall tax position for FY 2025-26.

CGT Indexation for Shares and Managed Funds

If you own shares or managed fund units acquired before September 1999, the indexation method applies on a per-share or per-unit basis. You cannot average the cost base across your entire holding.

Most brokers and share registries provide historical cost base data for pre-1999 share acquisitions. You can use the ATO's indexation factors to calculate the indexed cost base for each parcel of shares.

Managed funds often provide a "CGT statement" at the end of the financial year that includes the indexed cost base for pre-1999 units. If the fund does not provide this, you can calculate it yourself using the fund's unit prices at the time of acquisition.

Frequently Asked Questions

Can I use the indexation method for an asset I inherited?

Yes, but the rules depend on when the deceased acquired the asset. If the deceased acquired the asset before 20 September 1985, it is a pre-CGT asset and no CGT applies. If acquired between 20 September 1985 and 20 September 1999, the beneficiary can use the indexation method based on the deceased's cost base. The deemed acquisition date for the beneficiary is the date of death.

Does the indexation method apply to collectables like art or jewellery?

Yes, if the collectable was acquired before 21 September 1999 and the cost was above $500 (the collectable threshold). The same indexation rules apply. However, remember that capital losses on collectables can only be offset against capital gains from other collectables, not against other types of capital gains.

What happens if the indexation factor is less than 1?

The indexation factor is capped at 1.000. If the CPI at disposal is lower than the CPI at acquisition (deflation), the factor is set to 1.000. This means your cost base is not indexed downward — you simply use the original cost base. In practice, Australia has not experienced sustained deflation since CGT was introduced, so this scenario is rare.

Do I need to index selling costs?

No. Selling costs (such as agent commissions, legal fees, and advertising costs) are added to the cost base in the year of disposal. They are not indexed because they are incurred at the time of sale. Only costs incurred at or before acquisition are eligible for indexation.

Can I use the indexation method for foreign assets?

Yes, if you are an Australian tax resident and the foreign asset was acquired before 21 September 1999. The same CPI index numbers apply regardless of where the asset is located. However, foreign currency fluctuations and foreign tax credits can add complexity. Consider consulting a tax professional for cross-border CGT calculations.