Page 119 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
EXAMPLE 9
USE OF AVERAGE SPOT RATES TO RECORD DEBTS FOR ACCOUNTING PURPOSES
On 15 May 1998 a company which exports fruit delivered a consignment of fruit free-on-board to the Durban harbour. The selling price was $15 000 which was payable within 30 days. The company’s nancial year ends on 31 May. Immediately prior to the commencement of each month the company estimates an average exchange rate at which all export transactions are recorded on the transaction date. During April 1998 an average rand/dollar exchange rate of 6,2400 was estimated for the month of May 1998.
MARKET RATES FOR PURPOSES OF THE EXAMPLE
DATE
SPOT RATE R/$
15-05-1998
6,4300
31-05-1998
6,4500
15-06-1998
6,4800
YEAR END 31-05-1998
Normal method
Average method
Ruling exchange rates : Transaction date Date of translation
Exchange difference :
[(6,4300 – 6,4500) x $15 000] [(6,2400 – 6,4500) x $15 000]
Tax result: Sales
Exchange difference
6,4300 6,4500
+R 300
R96 450 R 300
6,2400 6,4500
+R3 150
R93 600 R 3 150
R96 750
R96 750
YEAR END 31-05-1999
Normal method
Average method
Ruling exchange rates:
Date of previous translation Date of realisation
Exchange difference:
[(6,4500 – 6,4800) x $15 000] [(6,4500 – 6,4800) x $15 000]
Tax result:
Exchange difference
6,4500 6,4800
+R 450 R 450
6,4500 6,4800
+R 450 R 450
R 450
R 450
Note:
It is obvious from this example that the use of an average spot rate makes no difference in the net tax result, on condition that the transactions are in respect of the purchase and sale of trading stock.
SAIT CompendIum oF TAx LegISLATIon VoLume 2 111