Page 94 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
maturity date) is offered by the authorised foreign exchange dealer used by the taxpayer on translation date. Because the term to maturity of such other forward exchange contract will be shorter, the premium or discount should generally be less than the premium or discount in respect of the forward exchange contract which is being translated.
The rate applicable to a foreign currency option contract at translation or realisation date is usually the rate obtained by dividing the market value of that option on that date by the foreign currency amount, as speci ed in that option. Alternative rates
An ‘alternative rate’ to be used instead of any other rate prescribed in the de nition of ‘ruling exchange rate’, may be used by a taxpayer in the calculation of an exchange difference, if:
(a) it is determined and applied in terms of generally accepted accounting practice;
(b) the taxpayer applies the rate for accounting purposes; and
(c) the basis on which such rate is determined is approved by the Commissioner.
In exercising his discretion the Commissioner shall take into account the particular circumstances of the case and
also whether the speci c rates prescribed in terms of the de nition of ‘ruling exchange rate’ are inappropriate and inapplicable.
4.4.2 LOAN, ADVANCE OR DEBT
The exchange rate which must be used as the ruling exchange rate on the transaction date and on the date of translation, is normally the spot rate on such date. Where, however, for accounting purposes and in accordance with generally accepted accounting practice the taxpayer used the forward rate in terms of a forward exchange contract, the tax treatment will follow such accounting treatment.
Therefore, if, for accounting purposes, the taxpayer used the spot rate on—
(a) the transaction date, for the initial recording of the transaction; or
(b) the date of translation (year end), to translate the loan, advance or debt, such spot rate must, for tax purposes, also
be used as the ruling exchange rate on that transaction date or that date of translation, as the case may be. Alternatively, if—
(a) the loan, advance or debt is hedged by a related or matching forward exchange contract; and
(b) the taxpayer used, for accounting purposes, the forward rate in terms of such forward exchange contract—
(i) to record the loan, advance or debt on the transaction date; or
(ii) to translate the loan, advance or debt on the date of translation (year end),
then such forward rate must, for tax purposes, also be used as the ruling exchange rate on that transaction date or that date of translation, as the case may be.
The ruling exchange rate on the date of realisation is normally the spot rate on such date.
See annexure C, examples 1, 5 and 6.
When the loan, advance or debt is acquired on the transaction date or is disposed of on the date of realisation and the
consideration paid or payable, or received or receivable, in terms of that acquisition or disposal, is calculated by using a rate other than the spot rate on that date, the ruling exchange rate, and not the spot rate on such dates is the ‘acquisition rate’ or the ‘disposal rate’. Should the transaction have taken place at the ‘acquisition rate’, but the taxpayer used the forward rate to record the transaction on the transaction date, as set out above, then the ruling exchange rate for the taxpayer will also be the forward rate.
See annexure C, example 4.
Valuation of a transaction
Generally the cost price of a purchase transaction or the cost of an expense which is nanced by a loan, advance or debt, or the selling price of a sale transaction or the value of services rendered, which gives rise to a loan, advance or debt, is determined by using the spot rate on the transaction date in respect of that loan, advance or debt for purposes of the Act. Alternatively the transaction is valued with reference to the forward rate in terms of a related or matching forward exchange contract which has been entered into to hedge the loan, advance or debt arising from the transaction.
The use of the forward rate as the ruling exchange rate on transaction date in terms of paragraph (a)(i) of the de nition of ‘ruling exchange rate’, has the effect that the premium or discount on the forward exchange contract is included in the cost price or selling price of the item which is bought or sold, or the cost of an expense, or the value of services rendered. Such cost price or selling price is, for purposes of the Act, considered to be the cash price of such a purchase or sale transaction.
See annexure C, example 5.
The cost price of a xed asset on which a capital allowance may be claimed, may include a premium on a related or matching forward exchange contract, provided that the following criteria are met:
(a) the forward exchange contract is set to mature within 3 months from the acquisition of the asset;
(b) the forward exchange contract has been entered into prior to, at, or immediately after the transaction date, in order
to hedge the loan, advance or debt in respect of the purchase transaction; and
(c) the forward rate in terms of the forward exchange contract was used to record the loan, advance or debt for
accounting purposes in accordance with generally accepted accounting practice.
However, where the xed asset and related liability were, for accounting purposes, recorded at the forward rate and
the related or matching forward exchange contract which was used to hedge the transaction, matures more than 3 months after the date of acquisition of the asset, the premium or discount in respect of the forward exchange contract may not be spread over the term of the forward exchange contract and the cost price of the asset must be recorded at the spot rate for tax purposes. The deductibility of the premium on the forward exchange contract paid or payable or the taxability of the discount received or accrued is to be determined in terms of the provisions of sections 11 (a) or 11 (bb), or the de nition of ‘gross income’ in section 1 of the Act, as the case may be.
Where such a related or matching forward exchange contract is realised on a date prior to the transaction date for the purchase of the xed asset, any exchange difference realised must be treated as an exchange difference in terms of section 24I and may not be treated as part of the cost price of the xed asset.
See annexure C, example 15.
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