Edited version of private ruling

Authorisation Number: 1011694322909

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Convertible notes and capital gains tax

Question and answer

Does the redemption of convertible notes give rise to a capital loss?

No.

This ruling applies for the following period

Year ended 30 June 2010.

The scheme commenced on

1 July 2009.

Relevant facts and circumstances

You worked for your employer who paid you with convertible notes.

These notes were worth $1 each.

You did not declare the notes when you received them.

The company you worked for is in administration.

You received a sum of money for some of your notes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(4).

Income Tax Assessment Act 1997 Section 104-25.

Reasons for decision

Subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that in working out whether a taxpayer has derived an amount of ordinary income and when it is derived, the taxpayer is taken to have received the amount when it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

In determining the basis of derivation of income, paragraph 42 of Taxation Ruling 98/1 states that:

Employment income

Income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.

In your case, you received convertible notes as payment for work performed.

The convertible notes have been derived and therefore assessable on a receipts basis.

As the convertible notes had a value of $1 per note when you received them, the amount should have been declared in your tax return at the time you received the notes.

A capital gain or capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset)

The most relevant CGT event for the payment from the administrator is event C2.

SECTION 104-25 Cancellation, surrender and similar endings: CGT event C2

104-25(1)

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option - being exercised; or

(f) if the asset is a convertible interest - being converted.

In your case a C2 event occurred when you received money for the convertible notes.

The cost base for the notes is $1 each and the total capital proceeds is $xxxx and you still have a right to receive the remaining $xxxx.

As yet you have only received an interim payment for the notes and further money may be received for the remaining notes when the company is wound up or comes out of administration.

Any debt remaining after the administration or any subsequent liquidation of the company is complete could give rise to a capital loss.