Page 91 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
the point of view that all gains and losses on foreign exchange transactions are on revenue account and that such gains and losses arise on a day-to-day basis, as the underlying exchange rates uctuate.
The tax treatment of gains and losses on foreign exchange transactions will correspond to the accounting treatment thereof for the majority of transactions. Examples of situations where differences will arise are as follows:
(a) where a forward exchange contract entered into to serve as a hedge in respect of a transaction to be entered into, is
rolled over;
(b) in respect of the treatment of a premium paid on the acquisition of a foreign currency option contract. An option
premium is recognised for tax purposes when it is paid or received, which is not necessarily the case for accounting
purposes;
(c) where a forward exchange contract is ‘closed out’ by entering into an opposite forward exchange contract with the
same maturity date and underlying foreign currency value;
(d) in respect of exchange gains or losses arising from transactions contemplated in section 24I(7); or
(e) in respect of unrealised exchange gains or losses arising from an unhedged exchange item of a capital nature,
between connected persons.
2 Basic operation of section 24I
In terms of section 24I (2) a gain or loss on a foreign exchange transaction, which is de ned as an ‘exchange difference’ in section 24I (1), must be included in or deducted from the income of a taxpayer carrying on a trade within the Republic, if that exchange difference arose from a transaction entered into by that taxpayer in the course of that trade. An exchange difference is determined only in respect of an ‘exchange item’ as de ned in section 24I (1).
An exchange difference is determined in respect of each exchange item for the year of assessment in which such exchange item arose, as well as every subsequent year of assessment, until the year of assessment in which such exchange item is realised. In order to calculate an exchange difference for a speci c year of assessment, a commencement and nal date must be established in that year of assessment. The following combinations of commencement and nal dates are possible—
(a) transaction date and date of realisation;
(b) transaction date and date of translation (last day of the year of assessment);
(c) previous date of translation (last day of the previous year of assessment) and date of realisation; and (d) previous date of translation and new date of translation.
The exchange difference for a speci c year of assessment is determined by multiplying the foreign currency amount of the exchange item by the difference between the prescribed ‘ruling exchange rate’ on the commencement date in that year of assessment and the ‘ruling exchange rate’ on the nal date in that year of assessment. By so doing, the effect of the weakening or strengthening of the appropriate exchange rate over the period between the two dates, is converted into a gain or loss. This gain or loss is equal to the increase or decrease in the rand-value of the exchange item.
‘Transaction date’, ‘realised’, ‘translated’, ‘ruling exchange rate’ and various other concepts are also de ned in section 24I (1). The ow-chart in Annexure A illustrates how an exchange difference can be tested against the provisions of section 24I to determine the tax treatment thereof during a year of assessment.
3 Section 24I (2) – inclusion and deduction of exchange differences
In terms of section 24I (2) of the Act, which is hereafter partially quoted, certain basic requirements are prescribed before an exchange item may be taken into account for tax purposes.
‘(2) In determining the taxable income of any person derived from carrying on any trade by him within the Republic ... there shall be included in or deducted from the income so derived, as the case may be, any transitional exchange difference ... and any exchange difference—
(a) arising from a transaction entered into by such person in the course of such trade; or
(b) arising from a loan or advance owing by such person or a debt incurred by such person, where such loan or advance has been utilized or such debt has been incurred in order to nance expenditure incurred by a connected person in relation to such person in the course of the carrying on of any trade within the Republic by such connected person.’.
The carrying on of any trade within the Republic
As the opening words of section 24I (2) are, in substance, based on the opening words of section 11 (a), the general
meaning which has been attached to the words ‘... the carrying on of any trade ... within the Republic...’ by the South African case law (read together with the de nition of the term ‘trade’ in section 1 of the Act), should be adhered to.
The test of whether a transaction is entered into in the course of any trade and whether such trade is carried on within the Republic, always depends on the actual circumstances of the speci c case. A euro loan (exchange item) entered into by a taxpayer and utilised to nance a productive asset, such as manufacturing equipment would normally be considered to be incurred in the course of the taxpayer’s trade. The loan may, however, be utilised to nance a private loan to a shareholder, which will not necessarily be considered to be incurred in the course of a trade. As the merits of each case should be considered individually, it is impossible to formulate speci c guidelines in this regard.
It must be noted that source or deemed source of an exchange difference, premium or like consideration, or discount is irrelevant for purposes of the application of section 24I. The tax treatment of gains and losses on foreign exchange transactions in relation to section 9C and 9D of the Act will be dealt with in a separate practice note.
Exchange difference arising from a transaction
As the word ‘transaction’ is not a de ned term, the general meaning of the word, as used in the context of the relevant section, should be attached to it.
The entering into of a transaction may give rise to an exchange item. If an exchange difference arises from such an exchange item, then such exchange difference is considered to have arisen from such transaction. Therefore, the importation of stock on a dollar account may give rise to a debt. Any exchange difference owing from that debt, will be considered to have arisen from that importation transaction.
SAIT CompendIum oF TAx LegISLATIon VoLume 2 83