• Convertible notes issued after 14 May 2002

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    There has been a change to the tax treatment of convertible notes issued by a company after 14 May 2002 if the notes are traditional securities.

    Under the change:

    • any gains you make when these notes are converted or exchanged for ordinary shares in a company will not be ordinary income at the time of conversion or exchange, and any losses you make will not be deductible
    • instead, any gains or losses you make on the later sale or disposal of the shares (incorporating any gain or loss that would have been made on the conversion or exchange of the notes) will be
      • subject to CGT if you are an ordinary investor, or
      • ordinary income (or deductible, in the case of a loss) if you are in the business of trading in shares and other securities.
       

    If you are an individual who is an ordinary investor, this change means you will be able to get the benefit of the CGT discount if you own the shares for more than 12 months. 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* that was issued before 15 May 2002

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

    Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount included in your assessable income on conversion.

    The note is a traditional security* that was issued after 14 May 2002

     

    Gain (or loss) on conversion is disregarded.

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

    The note is qualifying security**.

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

    Cost base of shares includes amounts paid to acquire the note and any amount paid on conversion.

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

    Cost base of shares includes cost base of the convertible note, any amount paid on conversion and any amount included in your assessable income on conversion.

    * 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 deposit with a financial institutions or a secured or unsecured loan.

    ** 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) will be greater than 1.5% per annum.

    Last modified: 04 Mar 2016QC 27527