Page 104 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999 EXAMPLE 2
FORWARD EXCHANGE CONTRACT
The taxpayer entered into a forward exchange contract on 01-01-1998 in terms of which $150 000 would be purchased
on 30-06-1998 at a forward rate of 6,5200. The dollars purchased on 30-06-1998 were immediately resold at the spot rate. The taxpayer’s nancial year ends on 28 February.
MARKET RATES FOR PURPOSES OF THE EXAMPLE
DATE
SPOT RATE R/$
FORWARD RATE
6 MONTHS
4 MONTHS
01-01-1998
6,4000
6,5200
28-02-1998
6,4500
6,5400
30-06-1998
6,5800
Two methods of treatment are possible, for tax purposes:
Method 1 – The market related forward rate available for the remaining period of the forward exchange contract is used
as the ruling exchange rate on the date of translation.
Method 2 –The difference between the forward rate in terms of the forward exchange contract and the spot rate on the
transaction date of such contract, is spread over the period of such contract. The portion of such difference which is attributable to the period of such forward exchange contract which has not expired on the date of translation, is added to the spot rate on such date of translation, in order to determine the ruling exchange rate.
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SAIT CompendIum oF TAx LegISLATIon VoLume 2