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Conversion of notes to units

Last updated 5 October 2009

Special rules also apply to convertible notes issued by a unit trust after 28 January 1988 and before 11 May 1989. Any capital gain or capital loss made on their conversion to units in the unit trust is disregarded. Their cost base for future CGT purposes includes both the cost of the convertible note and any further amount payable on the conversion.

Where convertible notes were issued prior to 28 January 1988 and later converted into units, the cost base of the units received should include any amount payable on conversion plus the market value of the note at the time of conversion.

A capital gain or capital loss may arise on conversion of the note (except where notes were acquired before 20 September 1985) depending on the amount of capital proceeds received. The amount of capital proceeds is the value of the units received.

Example: Converting notes to shares

David bought 1,000 convertible notes in DCS Ltd for $5 each on 1 July 1983. Their expiry date was 1 July 1988, at which time shares in DCS Ltd were worth $10 each.

He decided to convert the notes to shares and no extra payment to the company was required upon conversion. The shares are treated as having been acquired when the notes were acquired (1 July 1983). Any capital gain or capital loss made on the shares is disregarded.

David bought another 1,000 convertible notes in DCS Ltd on 1 July 1986. These notes also cost $5 each. On expiry of the notes on 1 July 1999, shares in the company were worth $7 each. David also converted those notes to shares, which are subject to CGT.

As no further amount is payable on conversion of the notes, the cost base of the shares is the $5 originally paid for the note. If David uses the indexation method to calculate his capital gain, he can index the $5 from 1 July 1986 when he became liable to pay the cost of the notes.

End of example