Page 120 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
EXAMPLE 10
POSTPONEMENT OF EXCHANGE DIFFERENCES IN TERMS OF SECTION 24I (7), IN THE CASE OF A MANUFACTURER
The borrower is a South African company which manufactures crockery and pottery sets. On 31 May 1998 the company made a drawdown on a foreign loan facility arranged with a bank in Frankfurt, Germany to nance a kiln and as well as special clay used as raw material in the manufacturing process. On that date the supplier of the kiln was paid DM 375 000 and the supplier of the clay was paid DM 125 000. The loan bore interest at 8% and was repayable on 30 November 1998. The kiln was commissioned on 1 September 1998. The company’s nancial year ends on 31 August.
MARKET RATES FOR PURPOSES OF THE EXAMPLE
DATE
SPOT RATE R/DM
31-05-1998
3,7000
31-08-1998
3,6800
30-11-1998
3,7500
YEAR END 31-08-1998 Loan (DM500 000)
Ruling exchange rates:
Transaction date (31-05-1998) Date of translation (31-08-1998)
Exchange difference:
[(3,7000 – 3,6800) x DM500 000]
Interest incurred on the loan at the end of the year (DM10 000)
Ruling exchange rates:
Transaction date (31-08-1998)
Date of translation (31-08-1998) Exchange difference:
3,7000 3,6800
3,6800 3,6800
R10 000 gain
R nil
[(3,6800 – 3,6800) x DM10 000]
Note:
As the kiln had not been brought into use at the end of the year of assessment, all exchange differences shall be postponed and be taken into account in the year the kiln is brought into use for the purposes of the taxpayer’s trade.
Portion of exchange difference carried forward to the 1999 year of
assessment: R7 500 gain (R10 000 x DM375 000 ÷ DM500 000)
Note:
As DM125 000 of the loan of DM500 000 was not utilised for the acquisition of the kiln, which quali es in terms of section 24I (7) (a) (i), that portion of the exchange difference may not be postponed.
Portion of exchange difference included in income
in the 1998 year of assessment R2 500 gain (R10 000 – R7 500)
112 SAIT CompendIum oF TAx LegISLATIon VoLume 2