Page 99 - SAIT Compendium 2016 Volume2

PN 4/1999 Income Tax acT: PracTIce noTes PN 4/1999
The spreading is brought about by annually including in or deducting from a company’s income, as the case may be, 10 per cent only of the deferred amount of an exchange difference. The deferred amount consists of the sum of —
(a) unrealised exchange differences which arise during a current year of assessment in relation to a qualifying exchange
item; and
(b) the unrealised exchange differences, which arose in previous years, in relation to such qualifying exchange item,
reduced by such portions which have already been taken into account in income.
The spreading consequently takes place on the reducing balance basis.
The deferred amount of exchange differences, as at the end of the preceding year of assessment, which has not been
taken into account for tax purposes, must be reduced by —
(a) an amount which bears to the deferred balance the same ratio as any reduction in the amount of the uncovered loan
or advance expressed in the foreign currency from the end of the preceding year of assessment to the end of the current year of assessment bears to the amount of the uncovered loan or advance at the end of the preceding year of assessment; and
(b) 100 per cent if the loan or advance is—
(i) no longer between companies which are connected persons;
(ii) no longer of a capital nature; or (iii) not in existence.
Any reduction in the deferred balance must be included in or deducted from the taxpayer’s income, as the case may be, during the relevant year of assessment.
Where a qualifying exchange item is converted into a qualifying exchange item expressed in another foreign currency, any exchange difference arising as a result of the conversion, shall be included in the deferred amount in relation to the old qualifying exchange item. After conversion, the old and the new qualifying exchange items are deemed to be one and the same exchange item. The amount of the exchange item at the end of the preceding year must be restated in the currency of the new exchange item by applying the—
(a) exchange rate at which the conversion took place;
(b) disposal rate of the old qualifying exchange item; or
(c) acquisition rate of the new qualifying exchange item.
See annexure C, example 13
11 Section 24I (8) – anti-avoidance rules
Where—
(a) (b)
(i) any foreign exchange loss was incurred in respect of a transaction entered into by a person; or
(ii) any premium or other consideration was paid in respect of or in terms of a foreign currency option contract
entered into or acquired by a person; and
such transaction was entered into or such foreign currency option contract was entered into or acquired, solely or mainly to enjoy a reduction in tax by way of a deduction from income, such loss, or premium or other consideration shall not be allowed as a deduction from such person’s income in terms of subsection (2) or (4) of section 24I.
The provisions of section 103 (1) may, however, also be applied, in addition to the provisions of section 24I (8).
12 Disposals and acquisitions
Disposal or acquisition of a loan, advance or debt
Paragraphs (c) and (d) of the de nition of ‘transaction date’ in section 24I (1), determine the transaction date for the
acquisition by a person of an existing loan, advance or debt which is an asset. Paragraph (a) of the de nition of ‘realised’ determines the date of realisation where a loan, advance or debt is disposed of. The terms ‘acquisition rate’ and ‘disposal rate’ are also de ned in section 24I. The proviso to paragraph (a) of the de nition of ‘ruling exchange rate’ prescribes the circumstances whereunder the acquisition and disposal rates should be applied (see annexure C, example 4). Disposal or acquisition of a forward exchange contract
Reserve Bank regulations currently require that a xed and determined currency obligation must exist before a forward exchange contract may be entered into. The transfer of ownership of an existing forward exchange contract by way of negotiation, cession or in any other manner, is therefore an exception to the rule. Where, however, a disposal or acquisition of a forward exchange contract takes place at an exchange rate other than the spot rate or forward rate as prescribed in the Act, an alternative rate, which is used for accounting purposes in terms of generally accepted accounting practice, will be acceptable.
Disposal or acquisition of a foreign currency option contract
When a foreign currency option contract is originally entered into, there is generally a premium or like consideration payable by the person acquiring the option. A premium or like consideration paid, is, in terms of section 24I (4) (a), included in the income of the person who wrote the option and is deducted from the income of the person who acquired the option.
There is a market for existing foreign currency option contracts. They can therefore be traded after being issued. The consideration paid in respect of the transfer of a foreign currency option contract is, in terms of section 24I (4) (a) (ii), deducted from the income of the person who acquired the option. Such consideration is, however, included in the income of the person who disposed of the option, not directly, but indirectly, by reason of the fact that such consideration is used to determine the ruling exchange rate in respect of that foreign currency option contract on the date of realisation. In this regard see paragraph (c) (iii) of the de nition of ‘ruling exchange rate’.
13 The treatment of bad debts
Bad debts: provision and write-off thereof
Bad debts in respect of exchange items must be determined after providing for adjustments as a result of uctuations in the underlying exchange rates. This means that where an exchange item became bad or the recovery thereof became
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