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# Conversion of notes to units

Last updated 24 February 2020

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 on 1 July 1997. The notes cost \$5 each. Each convertible note is convertible into one DCS Ltd share. On expiry of the notes on 1 July 2000, shares in the company were worth \$7 each. David converted the notes to shares, which are subject to CGT. No further amount was payable on conversion of the notes. David sold the shares on 4 December 2002 for \$10 each.

The \$2 (\$7 − \$5) gain David made on the conversion of each the notes to shares was assessable to David as ordinary income at the time of conversion, that is, in the 1999-2000 income year. As such, David has no capital gain in that year.

The \$3 (\$10 − \$7) gain David made on the sale of each of the shares is subject to CGT. The \$7 cost base is the market value per share on the date the notes converted to shares. Because he sold the shares after 11.45am (by legal time in the ACT) on 21 September 1999 and owned them for at least 12 months, David can claim the CGT discount. David calculates his capital gain as follows:

 \$3 per share × 1,000 shares \$3,000 Less: CGT discount of 50% \$1,500 Net capital gain \$1,500

David includes the capital gain on his 2002-03 income tax return.

End of example

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