Deemed loan relationships: repos: tax rules: creditor repos
Definition of ‘creditor repo’ (CTA09/S543)
A company (‘the lender’) has a creditor repo if all of the following conditions are met:
- Condition A: under an arrangement another person (‘the borrower’) receives from the lender any money or other asset (‘the advance’).
- Condition B: in accordance with GAAP, the accounts of the lender for the period in which the advance is made record a financial asset in respect of the advance.
- Condition C: under the arrangement the borrower sells securities to the lender.
- Condition D: the arrangement provides that the lender will or may become entitled or obliged subsequently to sell those or similar securities.
- Condition E: in accordance with GAAP, the subsequent sale of the securities would extinguish the financial asset in respect of the advance that has been recorded in the lender’s accounts.
A company also has a creditor repo if it is a member of a partnership that meets these conditions.
These conditions are intended to cover normal repos executed under standard market documentation. However they also go slightly wider: since Condition D does not specify to whom the lender is entitled or obliged to sell the securities, this can be a person other than the ‘borrower’.
Creditor repo: example
- 1/1/09: A (borrower) sells securities to C (lender) for 100.
- 30/6/09: A repurchases the same or similar securities from C for 103, agreed at the outset (this includes a finance return of 3)
|C’s accounting entries, in accordance with GAAP|
|1/1/09 (making of advance):||Dr Financial Asset 100; Cr Cash 100|
|30/6/09 (repayment of advance):||Dr Cash 103; Cr Financial Asset 103|
C has a creditor repo because all of the conditions in CTA09/S543 are met:
- Condition A: A receives an advance of money from C.
- Condition B: in accordance with GAAP, C records a financial asset in respect of that advance.
- Condition C: A sells securities to C.
- Condition D: C is entitled or obliged to sell those or similar securities.
- Condition E: in accordance with GAAP, the selling of those securities extinguishes C’s financial asset in respect of the advance.
Further points to note
- This transaction corresponds to the debtor repo example at CFM46350 (where A is a company).
- C also has a creditor repo if, under the arrangement, it sells the securities to another person (‘B’) instead of to A. Such a transaction corresponds to the debtor quasi-repo example at CFM46370 (where A and B are companies).