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End of attention
When a convertible note that was issued by the company after 14 May 2002 is exchanged for a company share or shares and:
- there is a profit because the shares are worth more at the exchange date than the cost of the convertible note, or
- there is a loss because the shares are worth less than the cost of the convertible note
so long as the criteria below are met, that profit or loss is not recognized for tax purposes until the shares into which the notes were converted are disposed of.
Special rules govern the cost base of shares acquired in exchange for a convertible note and your entitlement to the capital gains tax discount in respect of those shares. For information on these rules see the publication Guide to capital gains tax.
To be eligible for this treatment the convertible note must meet the following criteria:
- The convertible note must have been issued after 7.30pm (by legal time in the Australian Capital Territory) 14 May 2002. The date the convertible note was acquired by the investor is not relevant, only the date the convertible note was issued by the company.
- Prior to its conversion, the convertible note was a traditional security - that is, a debt security not issued at a substantial discount to face value, and without deferred income features such as indexation of invested capital.
- After conversion, the shares into which the note converts are ordinary shares of a company. The shares do not have to be shares in the company that issued the convertible note. The note can be exchanged for shares in an unrelated company, but they must be ordinary shares of a company.
If the convertible notes do not meet all of the above criteria, they will be treated in the same way as convertible notes that were issued by a company between 10 May 1989 and 15 May 2002 as described above.
Last modified: 12 Jan 2005QC 27523