Page 90 - SAIT Compendium 2016 Volume2

PN 2/1996 Income Tax acT: PracTIce noTes PN 4/1999
assistance, will be interpreted to include not only interest or related nance charges, but also a discount or premium. Where the loan, advance or debt is denominated in rand, a rate not exceeding the weighted average of the South African prime rate plus 2 percentage points will be an acceptable nominal annual interest rate. Where the loan, advance or debt is denominated in a foreign currency, a rate not exceeding the weighted average of the relevant inter bank rate plus 2 percentage points will be an acceptable nominal annual interest rate. Any interest exceeding the above mentioned prescribed rates will be regarded as excessive interest and will consequently not be allowed as a deduction for income tax purposes.’
2. The amendment referred to in paragraph 1 above is effective from the date of publication of this notice and will apply to:
– Financial assistance granted on or after such date;
– Financial assistance granted before such date, but which does not have a xed date of repayment.
3. This notice was published in Government Gazette No 23407 dated 17 May 2002.
PRACTICE NOTE 4 OF 1999 – THE TREATMENT OF GAINS AND LOSSES ON FOREIGN EXCHANGE
TRANSACTION IN TERMS OF SECTION 24I OF THE INCOME TAX ACT, 1962 (THE ACT)
issued by:
THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE TABLE OF CONTENTS
1. Introduction
2. Basic operation of section 24I
3. Section 24I (2) – inclusion and deduction of exchange differences
4. De nitions: section 24I (1)
4.1 ‘Exchange item’
4.2 ‘Transaction date’ and ‘realised’
4.3 ‘Translate’’
4.4 ‘Ruling exchange date’’
4.4.1 General
4.4.2 Loan, advance or debt
4.4.3 Forward exchange contract
4.4.4 Foreign currency option contract 4.4.5 Affected contract
5. Section 24I (3) – transitional exchange differences
6. Section 24I (4) – premiums and discounts
7. Section 24I (5) – premiums/discounts on forward exchange contracts
8. Section 24I (6) – double deduction or double inclusion
9. Section 24I (7) – postponement of exchange differences
10. Section 24I (7A) – spreading of exchange differences
11. Section 24I (8) – anti-avoidance rules
12. Disposals and acquisitions
13. The treatment of bad debts
14. Assessed loss
15. Objection and appeal
ANNEXURE A: Determination of the taxation of gains and losses on foreign exchange transactions ANNEXURE B: Ruling exchange rates
ANNEXURE C: Examples
1 Introduction
The exchange rates between various currencies of the world have, for many years, increasingly been subject to substantial uctuations. In addition thereto, the extent and complexity of international currency trading has also increased substantially. At present, currency markets are extremely sophisticated and are characterised by their technological advancement, their liquidity and the large variety of currency and currency instruments which are quoted and traded by way of an electronic medium. Most currency dealers manage their portfolios with the assistance of advanced computer systems which frequently revalue currency items at its [sic] latest market value during the course of a day.
The Act, unfortunately, did not keep pace with the reality of the modern currency trading. Consequently it did not re ect the economic reality of currency transactions and the accounting representation thereof. Section 24B of the Act taxed realised gains and losses in respect of currency obligations, irrespective of whether they were of a capital nature or not. All other gains and losses on transactions in foreign currency were, for tax purposes, dealt with in terms of the general provisions of the Act. In terms of the de nition of ‘gross income’ in section 1 of the Act, and the provisions of section 11 (a), the taxation of gains or deductibility of losses depended inter alia on whether such gains or losses were realised or not and whether they were of a revenue or capital nature. In addition, the valuation of imported stock for purposes of section 22 of the Act also presented practical dif culties.
In order to address the shortcomings in the tax treatment of gains and losses on foreign exchange transactions, section 24I was introduced into the Act and certain other consequential amendments were made. Central to the amendments is
82 SAIT CompendIum oF TAx LegISLATIon VoLume 2