Deemed loan relationships: repos: tax rules: debtor repos
Definition of a debtor repo (CTA09/S548)
A company (‘the borrower’) has a debtor repo if all of the following conditions are met:
- Condition A: under an arrangement the borrower receives from another person (‘the lender’) any money or other asset (‘the advance’).
- Condition B: in accordance with GAAP, the accounts of the borrower record for the period in which the advance is received a financial liability in respect of the advance.
- Condition C: under the arrangement the borrower sells any securities to the lender.
- Condition D: the arrangement provides that the borrower will or may become entitled or obliged subsequently to buy those or similar securities.
- Condition E: in accordance with GAAP, the subsequent buying of the securities would extinguish the financial liability in respect of the advance that has been recorded in the borrower’s accounts.
A company also has a debtor repo if it is a member of a partnership that meets these conditions.
These conditions cover normal repos executed under standard market documentation. However they also go slightly wider: since Condition D does not specify from whom the borrower is entitled or obliged to buy the securities, this can be a person other than the ‘lender’.
Debtor repo: example
- 1/1/09: The borrower (A) sells securities to the lender (C), for which it receives an advance of 100.
- 30/6/09: A repurchases the same or similar securities from C for 103, agreed at the outset (this includes a finance charge of 3):
|A’s accounting entries, in accordance with GAAP|
|1/1/09 (receipt of advance):||Dr Cash 100; Cr Financial Liability 100|
|30/6/09 (repayment of advance):||Dr Financial Liability 103; Cr Cash 103|
A has a debtor repo because all of the above conditions are met:
- Condition A: A receives an advance of money from C.
- Condition B: in accordance with GAAP, A records a financial liability in respect of that advance.
- Condition C: A sells securities to C.
- Condition D: A is entitled or obliged to buy those or similar securities.
- Condition E: in accordance with GAAP, the buying of those securities extinguishes A’s financial liability in respect of the advance.
Further points to note
- This example corresponds to the creditor repo example at CFM46230 (where C is a company).
- A also has a debtor repo if, under the arrangement, it purchases the securities from another person (‘D’) instead of repurchasing them from C. Such a transaction corresponds to the creditor quasi-repo example at CFM46250 (where C and D are companies).