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  • Conversion of notes to shares

    Attention

    Warning:

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

    End of attention

    If you convert a convertible note acquired from a company before 20 September 1985 and do not make any further payment to the company on the conversion, the shares you receive are treated as if you acquired them before 20 September 1985. Therefore, any capital gain or capital loss is disregarded.

    In all other cases, the shares acquired by the conversion of a convertible note on or after 20 September 1985 will be subject to capital gains tax and the shares are taken to be acquired when the conversion happens.

    You may have acquired a convertible note before 20 September 1985 and paid or given something in relation to the conversion. In this case, the cost base of the shares received as a result of the conversion will include:

    • the market value of the note at the time of conversion, and
    • what you paid or gave.

    You may have acquired the convertible note on or after 20 September 1985 and, as a traditional security, the capital gain or capital loss you made on the conversion of the note was already included as income or deductions. In this case, the cost base of the shares is the market value at the time of the conversion.

    If you acquired the convertible note on or after 20 September 1985, and it was not a traditional security, the cost base of the shares will include:

    • the amount you paid to acquire the note, and
    • any amount you paid in relation to the conversion.

    Example
    Converting notes to shares

    David bought 1000 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 1000 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 capital gains tax.

    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.

    Last modified: 31 Aug 2010QC 16195