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Edited version of private advice
Authorisation Number: 5010068489038
Date of advice: 20 August 2020
Ruling
Subject: Promissory notes
Question
Is the income received as a convertible promissory note brought to account at the date of issue of the promissory note?
Answer
No, the convertible promissory note is not brought to account when the note issued. There is no assessable amount in the terms of agreement. The agreement shows that the company had/has no present legal obligation to pay any amount so there was no assessable income when the agreement was entered. The note is part of capital raising by the company who has promised to pay the lender the value of the services rendered to be treated as the contribution of this capital raising.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You are a sole trader registered for GST on a cash basis.
You have performed a significant amount of design work for company X which was founded in 20XX for the 20XX and 20XX financial years.
You have received a convertible promissory note with the promise to get paid the principal sum of XXXX, together with interest from the date of the convertible promissory note (Note). Interest shall accrue at a rate of ten percent (10%) per annum based on 365 days in a year.
The principle and accrued interest shall be due and payable by the company upon the earliest of:
(i) the Maturity Date and
(ii) the consummation of a Corporate Transaction.
If the note is not repaid or converted to Equity Securities by the date, 20 days following the Maturity Date, the interest rate on maturity or the date on which the Note is either repaid or converted to Equity Securities will be 10% per annum, unless converted into shares pursuant to Section 2.2 of the Note Purchase. If the repayment of the Note is not made on the stipulated date, the Note continues to be carried forward on the same terms.
The Note is not revenue but a general unsecured obligation of the company.
Relevant legislative provisions
S128AD (2)(a) of the Income Tax Assessment Act 1936
S128 AD(2)(b) of the Income Tax Assessment Act 1936
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