CFM51020 | Derivative contracts: the matters and computational rules: how amounts are taxed

CTA09/S571-574

Amounts are normally brought into account as income

Amounts (credits and debits) arising from derivative contracts and their related transactions are in most cases brought into account as income, in the same way as loan relationship credits and debits.

Possibility of chargeable gains treatment

However, under special rules that apply in a minority of cases, amounts may be brought into account as chargeable gains. This applies to certain property derivatives and derivatives embedded into certain convertible or asset-linked securities. Guidance is at CFM55000 to CFM55400 - this chapter of guidance does not deal with ‘chargeable gains treatment’.

Trading or non-trading?

CTA09/S573 and CTA09/S574 are similar to the provisions for, respectively, trading and non-trading loan relationships credits and debits. The debits and credits (including exchange gains and losses) from trading derivative contracts are treated as receipts and expenses of the trade and brought into account under CTA09/PT3

Debits and credits from derivative contracts not held for the purposes of a trade are aggregated with the loan relationship non-trading credits and debits and dealt with under CTA09/PT5. This will give a single excess of credits over debits, which is then charged to tax under CTA09/S299, or a single excess of debits over credits treated as a non-trading deficit - see CFM32010+.

CTA09/S573(4) provides that an amount which is deductible (for tax purposes) as an expense of a company’s trade by virtue of being a trading debit cannot be disallowed by CTA09/S53 as capital or by the ‘wholly and exclusively’ rule in CTA09/S54. This reinforces the rule in CTA09/S699 that gives priority to PT7 over all other tax provisions dealing with how amounts relating to derivative contracts might be brought into account.

For further detail on what is regarded as relating to trading, see CFM51130.