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Conversion of notes to units

Last updated 3 March 2016

Convertible notes – converted before 1 July 2001

Where the convertible note is a traditional security, the first element of the cost base and reduced cost base of the units is their market value at the time of conversion. Any capital gain or capital loss made on their conversion to units in the unit trust is disregarded.

Where the convertible note is not a traditional security and was issued by the unit trust after 28 January 1988, the first element of the cost base and reduced cost base of the units includes both the cost of the convertible note and any further amount payable on the conversion. Any capital gain or capital loss made on their conversion to units in the unit trust is disregarded.

Convertible notes – converted after 1 July 2001

Where the convertible note is a traditional security the first element of the cost base and reduced cost base of the units includes:

  • the cost base of the convertible note, plus
  • any amount paid on conversion, plus
  • any amount included in your assessable income on conversion.

Any capital gain or capital loss made on their conversion to units in the unit trust is disregarded.

Similarly, where the convertible note is not a traditional security and was issued by the unit trust after 28 January 1988, the first element of the cost base and reduced cost base of the units includes:

  • the cost base of the convertible note, plus
  • any amount paid on conversion, plus
  • any amount included in your assessable income on conversion.

Any capital gain or capital loss made on their conversion to units in the unit trust is disregarded.

Example – Converting notes to shares

David bought 1,000 convertible notes in DCS Ltd on 1 July 1997 (that is, notes that were issued before 15 May 2002). 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 2003 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 2000–2001 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 2003–04 income tax return.

End of example

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