Page 137 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes
PN 4/1999
Exchange difference:
[(4,7000 – 4,7500) x ($100 000 + $2 000 interest incurred)]
Debt (interest accrued from 31-08-1997, paid on 31-12-1997)
Ruling exchange rates:
Transaction date (31-12-1997) Date of realisation (31-12-1997)
Exchange difference: [(4,7000 – 4,7500) x $4 000]
4,7000 4,7500
R5 100 loss
R200 loss
Note:
Although interest accrues from 1-09-1997, the transaction date is assumed to be 31-12-1997.
Forward exchange contract
Ruling exchange rates:
Date of previous translation (31-08-1997) Date of realisation (31-12-1997)
Exchange difference:
[(4,7000 – 4,7500) x $106 000]
NET TAX RESULT
( + R0 + R0 + R0 + R0 – R5 100 – R200 + R5 300)
Note:
The effect of the application of the forward rate to translate the affected forward exchange contract is that the net exchange difference on the transaction is nil.
4,7000 4,7500
R5 300 gain
R nil
EXAMPLE 17
ILLUSTRATION OF HOW, FOR TAX PURPOSES, A GAIN MADE BETWEEN A FORWARD EXCHANGE
CONTRACT AND AN UNDERLYING POSITION ($50 000) IS TAKEN INTO ACCOUNT EVENLY OVER THE PERIOD OF THE FORWARD EXCHANGE CONTRACT, BY USING THE MARKET RELATED FORWARD RATE
A bank concluded a forward exchange contract on 1 March 1995 with a client. In terms of the contract the bank will sell $50 000 on 28 February 1999, at a forward rate of 4,6500. On 1 March 1995 the bank also purchased $50 000 at the spot rate on that date, which amount of dollars would be delivered to the client on 28 February 1999. The bank’s nancial year ends at the end of February.
MARKET RATES FOR PURPOSES OF THE EXAMPLE
DATE
SPOT RATE R/$
CALCULATED MARKET RELATED FORWARD RATE (remaining period)
DETERMINATION OF FORWARD RATE
01-03-1995
3,0500
4,6500 (4 years)
[3,0500 + (4,6500 -3,0500) x 4 ÷ 4]
29-02-1996
3,7500
4,9500 (3 years)
[3,7500 + (4,6500 -3,0500) x 3 ÷ 4]
SAIT CompendIum oF TAx LegISLATIon VoLume 2 129