Deemed loan relationships: repos: tax rules: debtor and debtor quasi-repos: further examples: net-paying
Example: debtor repo: income arises on securities during term of repo, no manufactured payment made (‘net-paying’ transaction)
(This transaction differs from the example in CFM46440 because the repurchase price is 93, not 103. However payment of that repurchase price extinguishes A’s financial liability in respect of the advance (Condition E of the debtor repo conditions), so A has a debtor repo in this case.)
- 1/1/09: A (borrower) sells securities to C (lender) for 100.
- 31/5/09: Securities pay income of 10 to C (dividend if equities, interest if debt securities).
- 30/6/09: A repurchases the same or similar securities from C for 93. This includes a finance charge of 3 (in practice the charge would be less than 3 because from 31/5-30/6/09 the advance is 90, not 100).
|A’s accounting entries, in accordance with GAAP|
|1/1/09 (receipt of advance):||Dr Cash 100; Cr Financial Liability 100|
|1/1/09-30/6/09 (repo ‘interest’ accrual):||Dr P&L 3; Cr Financial Liability 3|
|31/5/09 (real dividend/ interest paid to C, no manufactured payment received by A)||Dr Financial Liability 10; Cr Dividend/Interest accrual 10|
|30/6/09 (repayment of advance)||Dr Financial Liability 93; Cr Cash 93|
|Net Profit and Loss result:||Credit 10: income on securities|
|Debit 3: ‘interest’|
Tax Treatment of A
A’s tax treatment is the same as under the ‘gross-paying’ transaction (CFM46440), namely:
- A is treated as receiving the real income of 10 on 31/5/09. The treatment of this income will depend on whether A is a financial trader, and on the type of income.
- A’s finance charge of 3 is treated as interest for loan relationships purposes.
Further points to note
- If the securities are overseas equities, A’s entitlement to DTR is based on the tax deducted from the deemed manufactured overseas dividend received, not on the tax deducted from the real dividend (CFM46390).
- This transaction corresponds to the creditor repo example at CFM46320 (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’). In such a transaction both C and D (if they are companies) would have creditor quasi-repos. CFM46330 gives examples of creditor quasi-repos.