Convertible notes

Generally, convertible notes are treated as being on revenue account for income tax purposes. That is, any gains or losses realised upon their disposal, conversion or maturity will be on revenue account. 

However, where an investor converts the note and receives ordinary shares (or other such securities), these shares or securities will be on capital account and subject to the capital gains tax (CGT regime). As such, any gains realised may be able to be reduced by the CGT discount where the relevant conditions are met. Available capital losses may also be used to offset any capital gains. 

In some circumstances, convertible notes may be treated as CGT assets from the date of issue. Common examples of these are hybrid securities issued by banks and financial institutions. The tax treatment in these circumstances is explained in the CGT section.

Listed Investment Companies (LIC)

An LIC is an Australian resident company, listed on the Australian Securities Exchange (ASX), which carries on the business of managing an investment portfolio.

To determine whether an investment is classified as an LIC, investors should check the LIC classification list which is published on the ASX website.

Tax advantages of LICs

The following tax advantages exist for an investment in an LIC: 

1. CGT discount 

The CGT discount is not generally available to companies in respect of any net capital gains they may derive. However, when an LIC derives a capital gain in respect of an asset which has been held for 12 months or more, a special tax treatment may allow the benefit of the CGT discount to flow through to investors (this is achieved via a special treatment of relevant parts of dividend distributions). This treatment provides a broadly similar outcome to any discount a shareholder could have claimed had they owned the underlying asset directly and made a subsequent capital gain.

2. Dividend income 

Upon payment of dividends, LICs must separate that part of the dividend which relates to capital gains on assets held for more than 12 months. Dividends sourced from such LIC capital gains are referred to as the “attributable part”. Australian resident individuals and trusts are able to obtain a tax deduction equal to 50% of the attributable part of the dividend. A 33% deduction referrable to the attributable part of the dividend is available to complying superannuation funds. Franking credits may be available where the dividend is franked.

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