Page 126 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
EXAMPLE 13
DEFERRAL OF EXCHANGE DIFFERENCES IN RESPECT OF A QUALIFYING LOAN OR ADVANCE
A South African company borrowed $200 000 interest free from its foreign holding company on 1 April 1995 to expand it’s trading activities in the Republic. On 30 June 1996 the loan was converted to a loan denominated in pound sterling. The conversion took place at an exchange rate of $1,5000/£1. On 9 November 1997 the company repaid £100 000 of the loan. The company’s nancial year ends on 31 December.
SPOT RATES FOR PURPOSES OF THE EXAMPLE
DATE
R/$
R/£
01-04-1995
3,5500
31-12-1995
3,6000
5,5800
30-06-1996
3,7500
5,6200
31-12-1996
3,7800
5,6600
9-11-1997
5,7200
31-12-1997
5,7800
YEAR END 31-12-1995 Loan ($200 000)
Ruling exchange rates:
Transaction date (01-04-1995) Date of translation (31-12-1995)
Exchange difference:
[(3,5500 – 3,6000) x $200 000]
Note:
3,5500 3,6000
The loan complies with all the requirements for a qualifying exchange item. Therefore any exchange difference arising from such loan is spread in terms of section 24I(7A)(a)
Portion of exchange difference deductible from income in the 1995 year of assessment [R10 000 x 10%]
Exchange difference to be deducted in following years [R10 000 – R1 000]
YEAR END 31-12-1996
R1 000 loss R9 000 loss
Three alternatives are available for dealing with the conversion of the dollar loan to a loan in pound sterling, depending on the rates applied. The different alternatives do, however, have the same result.
R10 000 loss
118 SAIT CompendIum oF TAx LegISLATIon VoLume 2