Summary Taxation 399 Chapters 15-17, 19, 21, 31

Taxation 399

Chapter 15 – Foreign Exchange



• Expenditure incurred/ Income earned/ Asset acquired (s25D)
o Deduct the expense or include the income by converting the amounts to
rand
o Asset – claim capital allowances by converting the cost to rand
• Exchange items (s24I)
o Deduct the exchange loss or include the exchange gain
o Creditor/Debtor
o FEC
• Disposal of asset (par 43)
o Calculate CG or CL on date of disposal of the asset



Translation of Foreign Currency Amounts

• Two categories of rules regarding the translation of foreign currency amounts:
o The general translation rules (s 25D) and
o The specific translation rules
▪ Exchange gains/losses on exchange items = s24I
▪ Capital gains and losses = par 43

S25D Person Application Translation
(1) Non-natural • Amount received or At spot rate on transaction
persons, accrued date
including trust • Expenditure and losses
that carries on a incurred
trade
(2) Permanent • Determine taxable Average rate for year of
establishment income in functional assessment (n/a to PE that is
outside of RSA currency of PE in the common monetary
area)

(3) NP and non- • Amount received or Choice:
trading trusts accrued • At spot rate on
• Expenditure and losses transaction date OR
incurred • Average rate for year
of assessment

, Exchange differences on exchange items (s24I)




STEP 1: Identify the exchange item

STEP 2: Determine the ruling exchange rates on transaction date, realisation date
and translation date

STEP 3: Calculate the foreign exchange difference (gain or loss)

STEP 4: Determine if the foreign exchange differences should be deferred and
recognised in a subsequent year of assessment




Identify the exchange item – s24I(1) and (2)

• Exchange difference is in respect of an exchange item during YOA
• Unit of currency – unit in foreign currency (e.g. USD)
• Debt – includes following denominated in foreign currency:
o Creditors/debtors/loans
o Cash amounts held (e.g. deposit in foreign currency)
• Foreign exchange contract (FEC) – agreement to exchange an amount of
currency for another currency on a future date at a specified rate (obligation NOT
option)
• Local currency = definition in s24I(1) = only (a),(b),(c)

,Determine the different dates & exchange rates – s24I(1)

• Transaction date (TD) = defined
o Date loan was received
• Translation date (TLD) = ‘translate’ defined
o Year-end (end of YOA)
• Realisation date (RD) = ‘realised’ defined
o Date loan was repaid



• Exchange difference (gain or loss) = difference between the ruling exchange rates
on the TD and:
o Exchange rate on TLD → if the exchange item is outstanding at year-end,
OR
o Exchange rate on the RD → if realised before year-end



Determining the exchange differences – s24I(1) and (4)

4 possible scenarios:

• Exchange item acquired and realised during YOA
• Exchange item acquired and not realised during YOA
• Exchange item acquired in an earlier YOA and realised during current YOA
• Exchange item acquired in an earlier YOA and not realised during current YOA

, Determining if the FED should be deferred and recognised in a subsequent YOA

Acquisition of assets – s24I(7)

• NB! Note that not automatically applicable to ALL assets. Only machinery, plant,
implement, utensil, building / improvements and intellectual property
• The asset acquired not yet brought into use
• S24I(7) allows a deferral of the exchange differences differences i.r.o. loan /
advance / debt incurred to acquire asset (as well as any FEC) if:
o There is a FEC or another exchange item that offsets the risk, and
o It is reasonable to treat the two as part of the same transaction
• The timing rule states that:
o exchange difference must be deferred
o and taken into account in the YOA during which the asset is brought into
use in trade
• Provisio (a) – (c) no longer deferred if:
o The debt will no longer be incurred
o The debt has been fully utilized
o The debt is no longer held/brought into use for the purposes of such
person’s trade