Loan Relationships and Derivative Contracts Flashcards
(10 cards)
What is the definition of a loan relationship?
A money debt arising from a transaction of the lending of money
What is the default tax treatment of loan relationships and derivatives?
Tax follows the accounting treatment except in certain circumstances like connected party transactions
Connected parties must use amortised cost.
What is the equivalent rules to No gain/No loss for loan relationships?
Group continuity rules and transfers are tax neutral
Loan/derivative would be acquired at MV and a de-grouping charge would arise if the company leaves the group within 6 years.
Only difference is that deemed disposal is on the date of exit not date of transfer
What happens when all or part of a loan is written off?
A NTLR debit or credit is incurred for unconnected parties
There is no taxable income/deduction if between connected parties
Points to mention when hedging a derivative contract?
2 points
- Unless hedge is 100% effective, there will be fair value movements recognised in the accounts;
- These will be treated as NTLR credits and debits unless an election is made to disregard fair value movements.
What are the deemed release rules?
If a company acquires a debt from a third party owed by a connected party to the third party at undervalue, there will be a deemed release (taxable income) in the debtor company.
The third party company would recognise a NTLR debit for the amount released.
What are the two emptions to the deemed release rules for the debtor company and what does this mean to the debtor company if they apply?
- Equity for debt exception;
- Corporate rescue exemption.
If an exception applies the income from the deemed release will not be taxed
When does the debt for equity exception apply?
Condition 1 - It is an Arm’s length transaction
Condition 2 - The consideration is wholly shares
When does the corporate rescue exception apply?
Condition 1 - The debt must be released within 60 days of the acquistion of the debtor company
Conditon 2 - It is reasonable to assume that if the debt was not released there would be a material risk that within the next 12 months the debtor would not be able to pay it’s debts
What is unallowable purpose?
An unallowable purpose is when a loan has no commercial purpose or one of the main purposes is tax avoidance
