Page 122 - SAIT Compendium 2016 Volume2

PN 4/1999
Income Tax acT: PracTIce noTes
PN 4/1999
Value
$4 000 000
Period
4 months
Maturity date
1 February 1998
The contractor completed the contract only on 10 March 1998. Consequently the contract value was reduced by $80 000 ($4 000 000 x 2%). For purposes of the example the expenditure is considered to have been incurred on the date the contract was completed, ie 10 March 1994.
The company’ s nancial year ends on 28 February. It had a loss of R600 000 (100% in respect of mining) in its 1998 year of assessment and an income of R1 000 000 (100% in respect of mining) in the 1999 year of assessment, before the aforementioned transactions were taken into account.
The plant was brought into use on 10 March 1998.
MARKET RATES FOR PURPOSES OF THE EXAMPLE
DATE
SPOT RATE R/$
FORWARD RATE (contract period)
01-10-1997
5,3000
5,3600 (4 months)
01-02-1998
5,4000
28-02-1998
5,4500
01-03-1998
5,4600
YEAR END 28-02-1998 Debt ($4 000 000)
As the contract had not been completed, it is considered, for purposes of the example, that the debt had not been incurred and therefore no exchange difference is to be calculated. Because the contractor completed the contract only on 10 March 1998 the contract value was reduced by $80 000 ($4 000 000 x 2%).
Forward exchange contract
Ruling exchange rates:
Transaction date (01-10-1997) Date of realisation (01-02-1998)
Exchange difference:
[(5,3600 – 5,4000) x $4 000 000]
Note:
5,3600 5,4000
Section 24I(7) provides inter alia that, to the extent that a forward exchange contract was entered into to serve as a hedge for a debt to be incurred for the utilisation thereof to acquire, for example plant and machinery, the exchange difference arising from the forward exchange contract is to be carried forward until the plant and machinery has been brought into use for purposes of the taxpayer’s trade.
Furthermore, section 24I(7) contains a proviso which makes that section subject to the provisions of section 36 of the Act. However, as no capital expenditure has been incurred during the current year of assessment in terms of section 15 read with section 36, that proviso is not yet operative and the carry-forward of the exchange difference remained valid.
Portion of exchange difference carried forward to the 1999 year of
assessment: R156 800 gain (R160 000 x $3 920 000 ÷ $4 000 000)
Note:
An amount of $80 000 of the total value of the forward exchange contract of $4 000 000 was not related or did not match the debt of $3 920 000 which was incurred in the following tax year.
Portion of exchange difference included in income in the current R3 200 gain year of assessment
(R160 000 – R156 800)
R160 000 gain
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SAIT CompendIum oF TAx LegISLATIon VoLume 2