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  • Convertible notes
    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

    The Government has introduced legislation in Parliament to change the tax treatment of convertible notes issued by a company after 14 May 2002 if the notes are traditional securities.

    Under the proposal, there are no tax consequences at the time these convertible notes are converted or exchanged for ordinary shares in a company. Instead gains or losses will only be made when the shares are sold or disposed of.

    For ordinary investors, any gains or losses on the sale or disposal of the shares will be subject to CGT. This means individuals will be able to get the benefit of the CGT discount if they hold the shares for more than 12 months and are not carrying on a business trading in this kind of investments. The table below sets out how you calculate the cost base.

    Treatment of convertible notes acquired after 10 May 1989

    Convertible note

    Converted before 1 July 2001

    Converted on or after 1 July 2001

    The note is a traditional security (see note 1) that was issued before 15 May 2002.

    Gain on conversion is included as income (or loss on conversion deducted).

    Cost base of shares includes their market value at the date the convertible notes were converted.

    Gain on conversion is included as income (or loss on conversion deducted).

    Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount taxed on conversion.

    The note is a traditional security (see note 1) that was issued after 14 May 2002 (see note 2).

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    Gain (or loss) on conversion disregarded

    Cost base of shares includes cost base of the convertible note and any amount paid on conversion.

    The note is a qualifying security (see note 3).

    Accrued gains are included as income and any gain on conversion is included as income (or loss on conversion deducted).

    Cost base of shares includes market value on conversion.

    Accrued gains are included as income and any gain on conversion is included as income (or loss on conversion deducted).

    Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount taxed on conversion.

    Note 1: A traditional security is one that is not issued at a discount of more than 1.5%, does not bear deferred interest and is not capital indexed. It may be, for example, a bond, a debenture, a deposit with a financial institution or a secured or unsecured loan.

    Note 2: The change to the treatment of certain traditional securities issued after 14 May 2002 had not been passed by parliament by mid-June 2003. You will need to contact the ATO business enquiries line 13 28 61 to find out if the law changed.

    Note 3: A qualifying security is one that has a deferred income element, that is, it is issued under terms such that the investor's return on investment (other than periodic interest) will be greater than 1.5% per annum.

    Last modified: 25 Feb 2020QC 27448