Page 92 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
Transfer of an exchange difference to a connected person
Section 24I (2) (b) of the Act also makes provision for the inclusion in, or deduction from the income of the taxpayer,
of an exchange difference arising from a loan or advance owing by the taxpayer or a debt incurred by the taxpayer if—
(a) such loan or advance was utilised, or the debt was incurred to nance expenditure of a connected person in
relation to the taxpayer; and
(b) such expenditure was incurred by such connected person in the course of the carrying on by such connected
person, of any trade within the Republic.
Section 24I (2) (b) does not provide that such exchange difference may be included in or deducted from the income
of the connected person. A taxpayer may, however, by way of a charge or credit in respect of the cost of the nancing provided to the connected person, transfer exchange differences in respect of such exchange item to the connected person. Such a charge may be deducted by the connected person, for tax purposes, if it complies with the relevant section of the Act in terms of which it is claimed as a deduction. The charge will be taxable in the hands of the taxpayer.
4 De nitions: section 24I (1)
All the terms which are necessary for the application of section 24I, are de ned in section 24I (1). Five de nitions may be considered as the key de nitions, in that such de nitions form the basis for the determination of an ‘exchange difference’, as de ned (see paragraph 2 above). The ve key de nitions are ‘exchange item’, ‘transaction date’, ‘realised’, ‘translate’ and ‘ruling exchange rate’.
4.1 ‘EXCHANGE ITEM’
There are three basic categories of exchange items, namely— (a) the foreign currency amount which is owing—
(i) (ii)
(b) the
(c) the (i)
(ii)
by a taxpayer in respect of a loan, advance or debt (a liability); or
to a taxpayer in respect of a loan, advance or debt (including a unit of currency held by a taxpayer for its own bene t, or held by any other person on behalf of the taxpayer) (an asset);
foreign currency amount which is owing by or to a taxpayer in respect of a forward exchange contract; and foreign currency amount which—
the holder of a foreign currency option contract is entitled, but not obliged to buy or sell in terms of that contract; or
the writer of a foreign currency option contract is obliged to buy or sell in terms of that contract, should the holder of the contract exercise his option.
Cash balances in foreign currency
An exchange item contemplated in paragraph (b) of the de nition of exchange item in section 24I (1) includes a unit of
currency held by the taxpayer for its own bene t or held by any other person on behalf of the taxpayer. This paragraph, therefore, includes any cash balances which are held in foreign currency which are exchangeable for the currency of the Republic, for example, physical cash, bank balances, traveller’s cheques and xed deposits.
Consequently, an exchange difference in respect of a cash balance should be determined at every year-end (date of translation) on which it is still unrealised as well as on the date of realisation. For purposes of the determination of an exchange difference, the transaction date will be the date on which such cash balance is received by the taxpayer. The date of realisation will be the date on which such cash balance is utilised to acquire—
• an item which is not an exchange item (for example a dollar cash balance which is sold for rands); or
• another exchange item (for example a dollar cash balance which is sold for a German mark cash balance) or an asset
or to settle a liability.
Where the cash balance is held at year end, the ordinary rules of translation will apply.
Forward exchange contracts and foreign currency option contracts
Forward exchange contracts and foreign currency option contracts are speci cally excluded from the de nition of ‘trading stock’ in section 1 of the Act. The reason for this is that all foreign exchange gains and foreign exchange losses arising therefrom are taken into account for tax purposes by way of section 24I.
Loan
Stock or bonds, as capital market instruments, are interest-bearing arrangements and, therefore, have the characteristics of a loan which is repayable by the issuer thereof, on a future date. An investment in stock denominated in a foreign currency is, therefore, an exchange item in terms of paragraph (b) of the de nition of ‘exchange item’. The same will apply to money market instruments.
Trading stock
Stock is generally costed at the spot rate, although the forward rate may be used if a related or matching forward exchange contract has been entered into to hedge the debt relating to the stock and the forward rate has been used to record the debt for accounting purposes, in accordance with generally accepted accounting practice.
If stock is costed at the spot rate, any exchange difference must be dealt with in terms of section 24I and is in terms of section 22 (3) (a) speci cally excluded from the cost of trading stock.
If stock is costed at the forward rate in terms of a forward exchange contract entered into to hedge the debt in respect of the purchase of the stock, any premium on the forward exchange contract is not an exchange difference. It will therefore not be dealt with in terms of section 24I, but will form part of the cost of the stock. In these circumstances the premium on the forward exchange contract loses its character.
The cost of trading stock is determined at the time of purchase. Subsequent exchange differences do not affect the original cost price.
See annexure C, examples 5.1, 5.2, 5.3 and 5.4.
Change of the type of currency unit in which a loan, advance or debt is re ected
When an existing loan, advance or debt, which is re ected in a speci c currency, is exchanged and is thereafter re ected in another currency, it will, for purposes of the determination of the correct exchange difference (by using
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