Deemed loan relationships: repos: tax rules: debtor and debtor quasi-repos: further examples: no income
Example: debtor repo: no income arises on securities during term of repo
CFM46350 explains why A has a debtor repo in this case.)
- 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. This includes a finance charge of 3 (6 months at 6% per annum).
|A’s accounting entries, in accordance with GAAP in addition to the entries at CFM46350:|
|1/1/09-30/6/09 (repo ‘interest’ accrual):||Dr P&L 3; Cr Financial Liability 3 (the financial liability which has increased to 103 is reduced to nil by the payment of the repurchase price on 30/6/09)|
|Net Profit and Loss result:||Debit 3: ‘interest’|
Tax Treatment of A
A’s finance charge of 3 is treated as interest for loan relationships purposes.
Further points to note
- This transaction corresponds to the creditor repo example at CFM46300 (where C is a company).
- A’s tax treatment would be the same if, instead of repurchasing the securities from C, A purchased them from another person (‘D’). Such a transaction corresponds to the creditor quasi-repo examples at CFM46330 (where C and D are companies).