Page 95 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
Average spot rate
The ruling exchange rate on the transaction date with regard to exchange items which are loans, advances or debts, is generally the spot rate on that date. In order to simplify the recording of large volumes of transactions on different transaction dates, some undertakings use an average spot rate to record certain currency transactions for accounting purposes. Such an average spot rate may also, for tax purposes, be used on the transaction date as the ruling exchange rate in respect of exchange items which arose from transactions where trading stock was bought or sold, provided the same rate is used to record such transactions for accounting purposes. This average rate may, however, not be applied on translation or realisation of the relevant loan, advance or debt.
If historical spot rates are used to determine the average rates, such historical spot rates may not be more than two months old. If an average spot rate is based on spot rates which have been estimated for future periods, the period in respect of which an average spot rate has been estimated must agree with the period for which such average spot rate is to be applied for accounting purposes.
Taxpayers who apply an average spot rate to trading stock transactions must —
(a) notify the Commissioner of the basis used to calculate the average rate as well as any changes in the basis of
calculating the average rate;
(b) also use such basis for accounting purposes in terms of generally accepted accounting practice; and
(c) apply such basis consistently from year to year.
See annexure C, example 9.
4.4.3 FORWARD EXCHANGE CONTRACT
The ruling exchange rate on the transaction date is normally the forward rate in terms of the forward exchange
contract.
In paragraph (b) (ii) of the de nition of ruling exchange rate, the rate which is to be used at the date of translation (year
end) as the ruling exchange rate in respect of a forward exchange contract, is speci ed as either—
(a) the market-related forward rate which is available for the remaining period of that forward exchange contract; or (b) in the case where the forward exchange contract is an affected contract, the forward rate in terms of such affected
forward exchange contract.
When the taxpayer uses the forward rate in terms of the forward exchange contract as the ruling exchange rate for a
related and matching loan, advance or debt, on the date of translation, the ruling exchange rate for that forward exchange contract on the date of translation is also that forward rate.
The ruling exchange rate on the date of realisation is normally the spot rate on that date.
Market-related forward rate available for the remaining period
The use of the market-related forward rate available for the remaining period of the forward exchange contract, has the effect that exchange differences in respect of that forward exchange contract are taken into account for tax purposes over the period of that forward exchange contract. The market-related rate available for the remaining period of the forward exchange contract should be determined by obtaining from the authorised foreign exchange dealer used by the taxpayer, the closing rate on translation date for such remaining period for a similar foreign currency amount.
As an alternative, a rate that is substantially the same as such a market-related forward rate may be determined by spreading the premium or discount in respect of that forward exchange contract, over the period of that contract. This is practically implemented by spreading the difference between the forward rate in terms of that contract and the spot rate on the transaction date of that contract, over the period of that contract and by, on each date of translation, adding the amount attributable to the unexpired portion of the period of that forward exchange contract, to the spot rate on that date of translation.
The spreading of the premium or discount may be effected by applying either a straight-line or a compounding basis. The compounding basis has the effect that the amount per compounding period increases towards the end of the contract. The rate determined by either determining a quoted rate from the authorised foreign exchange dealer used by the taxpayer or the calculated market related rate, should be applied consistently during the term of a forward exchange contract and also to all forward exchange contracts of the taxpayer.
See annexure C, examples 2, 6 and 17.
4.4.4 FOREIGN CURRENCY OPTION CONTRACT
A foreign currency option contract is an agreement in terms of which a person acquires or grants the right to buy from
or sell to any other person, on or before a future date, a certain amount of a nominated foreign currency, at a speci ed exchange rate. The person who acquires the right to buy or sell, is not obliged to act in terms of the contract. Although performance in terms of a foreign currency option contract is conditional on the exercising of such right, that right has a market value which uctuates as the quoted spot rate of that speci ed foreign currency changes.
As in the case of loans, advances, debts and forward exchange contracts, uctuations in the rand value of foreign currency option contracts are taken into account as exchange differences for tax purposes. The rand value of a foreign currency option contract is determined by taking into account various variables. To determine the ruling exchange rate by reference to a single variable, for example the spot rate of the nominated foreign currency, will not result in the correct rand value. For this reason, the ruling exchange rate in respect of a foreign currency option contract must, in all cases, be calculated.
The ruling exchange rate on the transaction date is always nil. The reason for this is that the Act speci es that the ruling exchange rate for a ‘foreign currency option contract’ on transaction date should be nil. The acquisition cost (premium) in respect of a ‘foreign currency option contract’, is immediately deductible for tax purposes and on the other hand taxable if the taxpayer is the writer or seller of such option contract. The possibility that the market value of a ‘foreign currency option contract’ on the date of acquisition may differ from the acquisition cost does not affect the tax treatment thereof.
The ruling exchange rate on the date of translation is the rate which is determined by dividing the ‘market value’ of the foreign currency option contract on that date, by the foreign currency amount speci ed in that contract.
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