Page 97 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
exchange gains or losses which have already been taken into account previously to determine taxable income in terms of any other section of the Act, are not included in income or allowed as a deduction more than once.
Transitional exchange differences are phased-in in terms of section 24I (3), as follows—
(a) transitional exchange differences which are realised in the rst year of assessment after the commencement of section 24I (that is the rst year of assessment ending on or after 1 January 1994) are included in income or allowed
as a deduction in such year of assessment; and
(b) in respect of those transitional exchange differences which are not realised in that rst year —
(i) 50 per cent is included in income or allowed as a deduction in that rst year; and
(ii) the balance of 50 per cent is included in income or allowed as a deduction in the succeeding year.
It must be noted that exchange differences are to be calculated and treated in terms of section 24I (2) in the case of all exchange items in existence after the date when a transitional exchange difference is determined in respect of such an exchange item.
See annexure C, example 14.
6 Section 24I (4) – premiums and discounts
Foreign currency option contracts
There is normally a premium or similar consideration payable when entering into a foreign currency option contract and consideration payable when an existing foreign currency option contract is acquired. The inclusion in, or deduction, of a premium or consideration which is paid or received, from the income of a taxpayer is governed by section 24I (4) (a).
Such inclusion or deduction is conditional upon such foreign currency option contract being entered into or acquired by the taxpayer in the course of any trade carried on by him within the Republic. See paragraph 3 of this practice note for the discussion of the concept of ‘... the carrying on of any trade within the Republic’.
In terms of section 24I (4), any premium or similar consideration—
(a) received or paid in respect of the entering into of a foreign currency option contract by a person in the course of his
trade, is included in the income of the writer of that contract and is deducted from the income of the holder of that
contract, as the case may be (see example 3); and
(b) paid by a person in respect of the acquisition of an existing foreign currency option contract, is deducted from the
income of the person who acquired that contract.
See also under paragraph 12 ‘Disposal or acquisition of a foreign currency option contract’.
Forward exchange contract
On recording of a transaction for accounting purposes, there may be instances where a loan, advance or debt is recorded at the forward rate, in accordance with the alternative treatment, as described in paragraph 4.4.2, but the underlying asset, liability, item of income or expenditure is not recorded at the forward rate. In such situations the premium or discount not included in the amount of the underlying asset, liability, item of income or expenditure, must be spread on a day-to-day basis over the term of the forward exchange contract when calculating the taxpayer’s taxable income.
See annexure C, example 5.4.
7 Section 24I (5) – premiums/discounts on forward exchange
CONTRACTS
Section 24I (1) de nes a ‘premium or discount on a forward exchange contract’ as follows —
‘means the amount obtained by applying the difference between the forward rate in respect of a forward exchange contract and the spot rate on the date on which such forward exchange contract was entered into, to the foreign currency amount speci ed in such forward exchange contract;’.
Section 24I (5) identi es various circumstances under which an exchange difference in respect of a loan, advance or debt, includes such a premium or discount on a forward exchange contract.
When this occurs, the premium or discount portion included in such exchange difference must, in the application of section 24I (2), be included in the income of the taxpayer or deducted therefrom, on a day-to-day basis over the period of the forward exchange contract. These circumstances occur when the ruling exchange rates in respect of such loan, advance or debt comprise one of the following combinations—
Combination
First ruling exchange rate
Second ruling Exchange rate
1.
Spot rate on the transaction date
Forward rate
2.
Spot rate on previous date of translation (end of preceding year of assessment)
Forward rate
3.
Forward rate which differs from the forward rate which is used as the second ruling exchange rate because the original forward exchange agreement has been replaced by another forward exchange contract
Forward rate
4.
An alternative rate prescribed by the Commissioner to any of the preceding 3 rates
An alternative rate prescribed by the Commissioner to a forward rate
See annexure C, example 12.
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