Page 98 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
8 Section 24I (6) – double deduction or double inclusion
Section 24I (6) prevents the double deduction or double taxation of any exchange difference, premium or discount in respect of a forward exchange contract, transitional exchange difference or a premium or other consideration in respect of, or in terms of a foreign currency option contract. This is accomplished in that that section provides that where such inclusion in, or deduction from income can also be dealt with under any other provision of the Act, then the inclusion or deduction must be made in terms of section 24I instead of in terms of such other provision of the Act.
9 Section 24I (7) – postponement of exchange differences
The purpose of section 24I (7) is to postpone the inclusion in, or deduction from the taxpayer’s income, of exchange differences in terms of section 24I (2) and premiums or other consideration in terms of section 24I (4), until the year of assessment in which the assets (as mentioned in the subsection) to which it relates, are brought into use for purposes of that person’s trade.
This postponement applies to—
(a) any exchange difference arising in respect of a loan, advance or debt which is utilised by a taxpayer for purposes
speci ed in section 24I (7) (a) (i) and (ii);
(b) any exchange difference in respect of a forward exchange contract or foreign currency option contract which is
entered into by the taxpayer in (a) above to serve as a hedge for such existing or future loan, advance or debt
mentioned in (a) above; and
(c) any premium or other consideration in respect of a foreign currency option contract which is entered into or acquired
by the taxpayer in (a) above to serve as a hedge for such existing or future loan, advance or debt mentioned in (a)
above.
Loan, advance or debt which is still to be obtained or incurred
Section 24I (7) of the Act provides inter alia for the postponement to a later year of assessment of either any exchange
difference in respect of a forward exchange contract or a foreign currency option contract which is entered into or any premium or other consideration paid or payable in respect of a foreign currency option contract which is entered into or acquired to serve as a hedge in respect of a loan or advance obtained or to be obtained, or a debt incurred or to be incurred.
Suf cient proof that such forward exchange contract or foreign currency option contract was entered into as a hedge in respect of a loan, advance or debt which is still to be obtained or incurred, as the case may be, must be furnished before such postponement of exchange differences, or any premium, or other consideration will be allowed. Factors which will be taken into account in determining the intention of the taxpayer to hedge a transaction, include the amount of the relevant exchange items, transaction dates, realisation dates and contractual agreements.
If, in a subsequent year of assessment, it appears that such loan, advance or debt will no longer be acquired or entered into, or has not been utilised as required, then no further postponement shall take place and the exchange differences, premium or other consideration shall be taken into account in the determination of the taxable income in that year. The same principle will apply if the assets are not brought into use or the expenditure is not incurred, as the case may be.
See annexure C, examples 10 and 11.
Apportionment
The exchange difference, or premium, or other consideration, as contemplated in section 24I (7) (b) and (c) of the Act,
is postponed in terms of that section only to the extent that the relevant forward exchange contract or foreign currency option contract serves as a hedge in respect of an existing or future loan, advance or debt which is obtained or incurred or will be obtained or incurred, for the purposes mentioned in paragraph (a) of section 24I (7).
It is possible that the foreign currency amount of a forward exchange contract or foreign currency option contract, may exceed the portion of the foreign currency amount of the loan, advance or debt which is or will be utilised for such purposes. It is also possible that a single forward exchange contract or foreign currency option contract may serve as hedge for more than one loan, advance or debt, of which some are not utilised for such purposes. An apportionment must be done in such cases in order that only the appropriate portion of the exchange difference, or premium, or other consideration is postponed.
See annexure C, examples 10 and 11.
Subject to sections 36 and 37E
Section 24I (7) of the Act postpones the inclusion in, or deduction of an exchange difference or premium or other consideration, from a taxpayer’s income, until the year of assessment in which the qualifying assets are brought into use for purposes of the taxpayer’s trade.
If any deduction in respect of the cost of a qualifying asset is to be allowed having regard to section 36 or 37E, then the inclusion or deduction of such exchange difference, premium or other consideration, shall be postponed only until the rst year of assessment in which a deduction in respect of such qualifying asset is to be taken into account in the taxpayer’s taxable income, taking into account the provisions of section 36 or 37E.
See annexure C, example 11.
10 Section 24I (7A) – spreading of exchange differences
Companies often make loans or advances to, or receive loans or advances from, other companies in a group of companies, which loans or advances are of a capital nature.
A relief measure is available to soften the impact of taxation in respect of unrealised gains or losses arising from loans or advances between companies which are connected persons.
To qualify, a loan or advance must be of a capital nature and should not be covered by a forward exchange contract. Unrealised gains and losses on loans or advances which arose from the commencement of section 24I (excluding unrealised losses attributable to loans and advances made before 1 January 1995 in respect of years of assessments ending before 1 January 1996) shall qualify for the spreading of the exchange differences.
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