Unrealized foreign exchange gain loss tax treatment

BASIC OPERATION OF SECTION 24I.

Unrealized Loss

SECTION 24I 4 - PREMIUMS AND DISCOUNT. SECTION 24I 6 - DOUBLE DEDUCTION OR DOUBLE INCLUSION. SECTION 24I 8 - ANTI-AVOIDANCE RULES. THE TREATMENT OF BAD DEBTS.

Determination of the taxation of gains and losses on foreign exchange transactions. The exchange rates between various currencies of the world have, for many years, increasingly been subject to substantial fluctuations.

In addition thereto, the extent and complexity of international currency trading has also increased substantially. At present, currency markets are extremely sophisticated and are characterised by their technological advancement, their liquidity and the large variety of currency and currency instruments which are quoted and traded by way of an electronic medium.

Most currency dealers manage their portfolios with the assistance of advanced computer systems which frequently revalue currency items at its latest market value during the course of a day. The Act, unfortunately, did not keep pace with the reality of the modern currency trading. Consequently it did not reflect the economic reality of currency transactions and the accounting representation thereof.

Section 24B of the Act taxed realised gains and losses in respect of currency obligations, irrespective of whether they were of a capital nature or not. All other gains and losses on transactions in foreign currency were, for tax purposes, dealt with in terms of the general provisions of the Act. In terms of the definition of "gross income" in section 1 of the Act, and the provisions of section 11 athe taxation of gains or deductibility of losses depended inter alia on whether such gains or losses were realised or not and whether they were of a revenue or capital nature.

In addition, the valuation of imported stock for purposes of section 22 of the Act also presented practical difficulties. In order to address the shortcomings in the tax treatment of gains and losses on foreign exchange transactions, section 24I was introduced into the Act and certain other consequential amendments were made.

Central to the amendments is the point of view that all gains and losses on foreign exchange transactions are on revenue account and that such gains and losses arise on a day-to-day basis, as the underlying exchange rates fluctuate.

The tax treatment of gains and losses on foreign exchange transactions will correspond to the accounting treatment thereof for the majority of transactions.

Examples of situations where differences will arise are as follows: An option premium is recognised for tax purposes when it is paid or received, which is not necessarily the case for accounting purposes.

In terms of section 24I 2 a gain or loss on a foreign exchange transaction, which is defined as an "exchange difference" in section 24I 1must be included in or deducted from the income of a taxpayer carrying on a trade within the Republic, if that exchange difference arose from a transaction entered into by that taxpayer in the course of that trade. An exchange difference is determined only in respect of an "exchange item" as defined in section 24I 1. An exchange difference is determined in respect of each exchange item for the year of assessment in which such exchange item arose, as well as every subsequent year of assessment, until the year of assessment in which such exchange item is realised.

In order to calculate an exchange difference for a specific year of assessment, a commencement and final date must be established in that year of assessment. The exchange difference for a specific year of assessment is determined by multiplying the foreign currency amount of the exchange item by the difference between the prescribed "ruling exchange rate" on the commencement date in that year of assessment and the "ruling exchange rate" on the final date in that year of assessment.

By so doing, the effect of the weakening or strengthening of the appropriate exchange rate over the period between the two dates, is converted into a gain or loss. This gain or loss is equal to the increase or decrease in the rand-value of the exchange item. The flow-chart in Annexure A illustrates how an exchange difference can be tested against the provisions of section 24I to determine the tax treatment thereof during a year of assessment.

In terms of section 24I 2 of the Act, which is hereafter partially quoted, certain basic requirements are prescribed before an exchange item may be taken into account for tax purposes.

The carrying on of any trade within the Republic. As the opening words of section 24I 2 are, in substance, based on the opening words of section 11 athe general meaning which has been attached to the words " The test of whether a transaction is entered into in the course of any trade and whether such trade is carried on within the Republic, always depends on the actual circumstances of the specific case.

A euro loan exchange item entered into by a taxpayer and utilised to finance a productive asset, such as manufacturing equipment would normally be considered to be incurred in the course of the taxpayer's trade. The loan may, however, be utilised to finance a private loan to a shareholder, which will not necessarily be considered to be incurred in the course of a trade.

As the merits of each case should be considered individually, it is impossible to formulate specific guidelines in this regard. It must be noted that source or deemed source of an exchange difference, premium or like consideration, or discount is irrelevant for purposes of the application of section 24I. The tax treatment of gains and losses on foreign exchange transactions in relation to section 9C and 9D of the Act will be dealt with in a separate practice note.

Exchange difference arising from a transaction. As the word "transaction" is not a defined term, the general meaning of the word, as used in the context of the relevant section, should be attached to it. The entering into of a transaction may give rise to an exchange item. If an exchange difference arises from such an exchange item, then such exchange difference is considered to have arisen from such transaction. Therefore, the importation of stock on a dollar account may give rise to a debt.

Any exchange difference flowing from that debt, will be considered to have arisen from that importation transaction. Transfer of an exchange difference to a connected person.

Section 24I 2 b does not provide that such exchange difference may be included in or deducted from the income of the connected person. A taxpayer may, however, by way of a charge or credit in respect of the cost of the financing provided to the connected person, transfer exchange differences in respect of such exchange item to the connected person. Such a charge may be deducted by the connected person, for tax purposes, if it complies with the relevant section of the Act in terms of which it is claimed as a deduction.

The charge will be taxable in the hands of the taxpayer. All the terms which are necessary for the application of section 24I, are defined in section 24I 1. The five key definitions are "exchange item""transaction date""realised""translate" and "ruling exchange rate". Cash balances in foreign currency. An exchange item contemplated in paragraph b of the definition of exchange item in section 24I 1 includes a unit of currency held by the taxpayer for its own benefit or held by any other person on behalf of the taxpayer.

This paragraph, therefore, includes any cash balances which are held in foreign currency which are exchangeable for the currency of the Republic, for example, physical cash, bank balances, traveller's cheques and fixed deposits.

Consequently, an exchange difference in respect of a cash balance should be determined at every year-end date of translation on which it is still unrealised as well as on the date of realisation. For purposes of the determination of an exchange difference, the transaction date will be the date on which such cash balance is received by the taxpayer. The date of realisation will be the date on which such cash balance is utilised to acquire.

Where the cash balance is held at year end, the ordinary rules of translation will apply. Forward exchange contracts and foreign currency option contracts. Forward exchange contracts and foreign currency option contracts are specifically excluded from the definition of "trading stock" in section 1 of the Act.

The reason for this is that all foreign exchange gains and foreign exchange losses arising therefrom are taken into account for tax purposes by way of section 24I. Stock or bonds, as capital market instruments, are interest-bearing arrangements and, therefore, have the characteristics of a loan which is repayable by the issuer thereof, on a future date. An investment in stock denominated in a foreign currency is, therefore, an exchange item in terms of paragraph b of the definition of "exchange item".

The same will apply to money market instruments. Stock is generally costed at the spot rate, although the forward rate may be used if a related or matching forward exchange contract has been entered into to hedge the debt relating to the stock and the forward rate has been used to record the debt for accounting purposes, in accordance with generally accepted accounting practice.

If stock is costed at the spot rate, any exchange difference must be dealt with in terms of section 24I and is in terms of section 22 3 a specifically excluded from the cost of trading stock. If stock is costed at the forward rate in terms of a forward exchange contract entered into to hedge the debt in respect of the purchase of the stock, any premium on the forward exchange contract is not an exchange difference.

It will therefore not be dealt with in terms of section 24I, but will form part of the cost of the stock. In these circumstances the premium on the forward exchange contract loses its character. The cost of trading stock is determined at the time of purchase. Subsequent exchange differences do not affect the original cost price. See annexure C, examples 5.

Change of the type of currency unit in which a loan, advance or debt is reflected. When an existing loan, advance or debt, which is reflected in a specific currency, is exchanged and is thereafter reflected in another currency, it will, for purposes of the determination of the correct exchange difference by using comparable exchange rates be considered that such loan, advance or debt has been realised on the date of exchange and that a new exchange item came into existence on that date.

See annexure C, example 8. Where the other currency in which the loan, advance or debt is reflected after such exchange, is the currency of the Republic, then such loan, advance or debt is considered to have been realised on the date of such exchange without a new loan, advance or debt coming into existence.

An example of such an exchange will be where a loan due by a foreign subsidiary to the holding company in the Republic, which loan is payable in a foreign currency, is converted to a loan payable in rands. From that date, exchange differences are determined in respect of such exchange items. The transaction date is, in relation to. The day on which the taxpayer. The day on which. The day on which that contract was entered into; and. The day on which that contract was entered into or acquired.

In terms of the definition of "realised", the time of realisation of an exchange item is, in the case of. When and to the extent that payment is received or made, or when and to the extent to which the loan, advance or debt is settled or disposed of in any other manner.

When payment is received or made in respect of that contract. When payment is received or made in respect of the right having been exercised in terms of that contract, or when such contract expires without such right having been exercised, or when such contract is disposed of.

Spot rate transactions normally transactions in respect of cash balances. Transactions which are concluded at spot rate, for example, where dollars which are held in cash are sold for rands, generally allow two business days after the day of such transaction for the delivery of the cash. In terms of the definitions " transaction date " and " realised ", the transaction date and the date of realisation is, in the case of a loan or advance, generally the date on which payment is made or received.

For a spot rate transaction, the transaction date if currency has been purchasedor the date of realisation if currency has been soldwould be the date on which the transaction was concluded, irrespective of when the cash would be exchanged during the following two business days. This is accomplished by multiplying the foreign currency amount of the exchange item by the ruling exchange rate. The definition of "ruling exchange rate" determines for every type of exchange item, for the purposes of the determination of an exchange difference, the exchange rates which are applicable on the relevant dates.

A summary thereof appears in annexure B. The term "ruling exchange rate" is defined for purposes of the determination of exchange differences in respect of exchange items.

In order to determine the correct exchange difference, the ruling exchange rate should be stated in the format of quantity of rands for every foreign currency unit.

Various types of ruling exchange rates. The rate applied on translation date must be the closing rate quoted by the authorised foreign currency dealer used by the taxpayer for the relevant day for a similar amount of foreign currency. The quoted selling rate must be applied in the case of an exchange item which is a liability and the quoted buying rate where the exchange item is an asset. See point 12 in this regard. The market-related forward rate available for the remaining period of a forward exchange contract is the rate at which another forward exchange contract with similar terms specifically in respect of the foreign currency amount and the maturity date is offered by the authorised foreign exchange dealer used by the taxpayer on translation date.

Because the term to maturity of such other forward exchange contract will be shorter, the premium or discount should generally be less than the premium or discount in respect of the forward exchange contract which is being translated. The rate applicable to a foreign currency option contract at translation or realisation date is usually the rate obtained by dividing the market value of that option on that date by the foreign currency amount, as specified in that option.

An " alternative rate " to be used instead of any other rate prescribed in the definition of " ruling exchange rate ", may be used by a taxpayer in the calculation of an exchange difference, if: In exercising his discretion the Commissioner shall take into account the particular circumstances of the case and also whether the specific rates prescribed in terms of the definition of " ruling exchange rate " are inappropriate and inapplicable.

The exchange rate which must be used as the ruling exchange rate on the transaction date and on the date of translation, is normally the spot rate on such date. Where, however, for accounting purposes and in accordance with generally accepted accounting practice the taxpayer used the forward rate in terms of a forward exchange contract, the tax treatment will follow such accounting treatment.

Therefore, if, for accounting purposes, the taxpayer used the spot rate on. The ruling exchange rate on the date of realisation is normally the spot rate on such date.

See annexure C, examples 15 and 6. When the loan, advance or debt is acquired on the transaction date or is disposed of on the date of realisation and the consideration paid or payable, or received or receivable, in terms of that acquisition or disposal, is calculated by using a rate other than the spot rate on that date, the ruling exchange rate, and not the spot rate on such dates is the " acquisition rate " or the " disposal rate ".

Should the transaction have taken place at the " acquisition rate ", but the taxpayer used the forward rate to record the transaction on the transaction date, as set out above, then the ruling exchange rate for the taxpayer will also be the forward rate. See annexure C, example 4. Valuation of a transaction. Generally the cost price of a purchase transaction or the cost of an expense which is financed by a loan, advance or debt, or the selling price of a sale transaction or the value of services rendered, which gives rise to a loan, advance or debt, is determined by using the spot rate on the transaction date in respect of that loan, advance or debt for purposes of the Act.

Alternatively the transaction is valued with reference to the forward rate in terms of a related or matching forward exchange contract which has been entered into to hedge the loan, advance or debt arising from the transaction. The use of the forward rate as the ruling exchange rate on transaction date in terms of paragraph a i of the definition of "ruling exchange rate", has the effect that the premium or discount on the forward exchange contract is included in the cost price or selling price of the item which is bought or sold, or the cost of an expense, or the value of services rendered.

Such cost price or selling price is, for purposes of the Act, considered to be the cash price of such a purchase or sale transaction. See annexure C, example 5. The cost price of a fixed asset on which a capital allowance may be claimed, may include a premium on a related or matching forward exchange contract, provided that the following criteria are met: However, where the fixed asset and related liability were, for accounting purposes, recorded at the forward rate and the related or matching forward exchange contract which was used to hedge the transaction, matures more than 3 months after the date of acquisition of the asset, the premium or discount in respect of the forward exchange contract may not be spread over the term of the forward exchange contract and the cost price of the asset must be recorded at the spot rate for tax purposes.

The deductibility of the premium on the forward exchange contract paid or payable or the taxability of the discount received or accrued is to be determined in terms of the provisions of sections 11 a or 11 bBor the definition of "gross income" in section 1 of the Act, as the case may be. Where such a related or matching forward exchange contract is realised on a date prior to the transaction date for the purchase of the fixed asset, any exchange difference realised must be treated as an exchange difference in terms of section 24I and may not be treated as part of the cost price of the fixed asset.

See annexure C, example 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. See annexure C, example 9. 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 definition 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 specified as either. 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 26 and 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 specified 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 fluctuates as the quoted spot rate of that specified foreign currency changes. As in the case of loans, advances, debts and forward exchange contracts, fluctuations 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 dax definition stock market always nil.

The reason for this is that the Act specifies 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 investing tips stock market 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 specified in that contract.

Where a taxpayer consistently includes any change in the value of all his foreign currency option contracts in his accounting profit and the value is determined by applying a market-related valuation method which apart from the intrinsic value of that option, also takes into account variables such as timethen the value so determined is the market value. In all other cases it is the "intrinsic value" of that foreign currency option contract.

It is the gain which the holder of a foreign currency option contract could realise by exercising that option contract at a given time, because the option strike rate at that time is more favourable than the spot rate. When the exercising of a foreign currency option contract will result in a loss scottrade options tools the holder of that contract, the intrinsic value sydney forex opening hours gmt nil for both the holder and writer, because that work from home hcc coding would not be exercised under such circumstances.

This evaluation must be done on date of translation even where the holder of the foreign currency option contract does not have the right to exercise the option on that date, but only on maturity of the option.

The "market value" of a foreign currency option contract is, for the writer of such contract a negative value a liability of which the absolute value is equal to the market value of such contract for the holder thereof. This means that where the market value of a foreign currency option contract increases for the holder of such contract and an exchange gain consequently accrues to such person in respect thereof, the writer of such contract incurs an exchange pmg forex factory of the same magnitude.

If a foreign currency option contract is realised by the exercising thereof, or by allowing the contract to expire without it being exercised, the ruling exchange rate is calculated by dividing the market value of that foreign currency option contract by the relevant foreign currency amount. The market value of a foreign currency option contract at the exercising thereof is equal to the intrinsic value at that time.

The market value of a foreign currency option contract which has expired, is always nil. It is important to note that the option holder's loss is limited to the premium paid or acquisition cost, but his profit potential is unlimited, while the writer's profit is limited to the premium received or consideration received on disposal, but his loss potential is unlimited.

See annexure C, example 3. If a foreign currency option contract is realised by the disposal thereof, then the ruling exchange rate is calculated by dividing the amount received or accrued as a result of the disposal thereof, by the foreign currency amount.

Where a taxpayer takes out cover by way of either a forward exchange contract or a foreign currency option contract to serve as a hedge for future loans, advances or debts in foreign currency the amounts of which both capital and interest can be determined with certainty, the forward exchange contract should be translated at the forward rate and the foreign currency option contract should be translated at the rate determined by dividing the consideration e.

This option is available only where the underlying exchange item has not yet arisen at year-end, but for which an agreement has already been entered into and. The effect will be that no exchange differences will arise on the translation money earnin mount vernon lyrics a forward exchange contract or foreign currency option contract entered into to serve as a hedge in respect of such trading options with bollinger bands and the dual cci loan, advance or debt until the underlying exchange item comes into existence.

It is the accumulated unrealised foreign exchange gain or loss which, in respect of certain exchange items, existed on the date of commencement of section 24I.

Every transitional exchange difference is included in income, or deducted therefrom, in terms of section 24I 2 if it complies with the basic requirements of that section. Such inclusion or deduction must be effected taking into account the phasing-in provisions, as incorporated in section 24I 3.

Section 24I of the Act came into effect from the beginning of the first year of assessment ending on or after 1 January Transitional exchange differences are determined in respect of all exchange items which existed on the last day of the year of assessment which ended prior to the commencement of section 24I, except for loans, advances or debts contemplated in paragraph b of the definition of "exchange item"which are of a capital nature.

The capital nature of these exchange items should be determined according to the ordinary rules relating to capital versus income. An example of a loan in respect of which a transitional exchange difference need binary options dictionary be determined, is a long-term loan from a South African holding company which loan is not floating or circulating capital in the hands of the lender to its foreign subsidiary, where such loan forms part of the fixed investment in such subsidiary by such holding company.

In order to determine a transitional exchange difference, the provisions of section 24I are deemed to apply on the transaction date of the relevant exchange item and on the last day of the year of assessment date of translation which ends immediately prior to the commencement of section 24I. The transitional exchange difference is calculated by multiplying the difference between the ruling exchange rate on those two dates, by the foreign forex trading minimum spread amount of the exchange item.

The transitional exchange difference so determined must, however, be adjusted to ensure that all the 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.

Foreign exchange gains and losses | SA Tax Guide

Transitional exchange differences are phased-in in terms of section 24I 3as follows. 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.

SECTION 24I 4 - Forced matrix to make money 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 " In terms of section 24I 4any premium or similar consideration.

See also under paragraph 12 "Disposal or acquisition of a foreign currency option 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. 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.

Section 24I 5 identifies 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 2be included in the income of the taxpayer or deducted therefrom, on a day-to-day basis over the period of the forward exchange contract.

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.

IAS 21 The Effects of Changes in Foreign Exchange Rates

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.

The purpose of section 24I 7 is to postpone the inclusion in, or deduction from bright house networks home automation taxpayer's income, of exchange differences in terms of section 24I 2 and premiums or other consideration in terms of section 24I 4until the year of assessment in which the assets as mentioned scottrade options expiration date the subsection to which it relates, are brought into use for purposes of that person's trade.

This postponement applies to. Loan, advance or debt which is still blacklisted forex company in malaysia 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 unrealized foreign exchange gain loss tax treatment in respect buying penny stock on etrade 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.

Sufficient 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 real time graphics binary options charts The exchange difference, or premium, forex morning trade journal 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.

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. 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 jquery mobile select option value 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. The spreading is brought about by annually including in or deducting from a company's income, as the case may be, 10 percent only of the deferred amount of an exchange difference. The deferred amount consists of the sum of. 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.

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 sas forex training center 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. The provisions of section 1 may, however, also be applied, in addition to the provisions of section 24I 8. Disposal or acquisition of a loan, advance or debt.

Paragraphs c and d of the definition of "transaction date" in section 24I 1determine the transaction date for the acquisition by a person of an existing loan, advance or debt which is an asset. Paragraph a of the definition 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 defined in section 24I. The proviso to paragraph a of the definition 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 fixed 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 aincluded in the income of the person who wrote the option spread option put call parity formula 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 iideducted 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 definition of "ruling exchange rate". Bad debts in respect of exchange items must be determined after providing for adjustments as a result of fluctuations in the underlying exchange rates. This means that where an exchange item became bad or the recovery thereof became doubtful, the loss, bad debt or allowance in terms of sections 11 a11 i and 11 jin respect of such an exchange item, are based on an amount which takes into account all exchange differences which were, or will be, included in or deducted from the taxpayer's income in any previous year or in the current year of assessment.

This is achieved by basing such loss, bad debt, or allowance on the amount which is obtained by multiplying the spot rate, in respect of such exchange item on right binary options trading signals franco date of write-off, by the foreign currency amount to the extent that it is irrecoverable of such exchange item.

The total deduction which is determined in the above-mentioned manner for purposes of section 11 jis included, in terms of that section, in the income of the taxpayer during the succeeding year of assessment. Exchange items, to the extent that the foreign currency amount thereof became irrecoverable and in respect of which a loss or a bad debt was allowed as a deduction from income in terms of sections 11 a and 11 i are, for practical purposes, considered to have been realised for purposes of section 24I.

Thus, no further exchange differences are thereafter taken into account for tax purposes in respect of such exchange items, except in respect of that portion of the amount of the exchange item written-off, which is recouped or recovered at a later stage. In this regard see the paragraph dealing with the recoupment of bad debts written-off. An exchange difference on debt written off, calculated from the translation or transaction date to the write off date will, therefore, be included in taxable income and the amount of the debt translated on write off date will be considered as a deduction in terms of sections 11 a or 11 i.

Tax treatment of foreign exchange gains & losses (ITA) | RCGT

Exchange items in respect of which an allowance in terms of section 11 j has been granted, remain exchange items until the date on which they are realised in a manner defined in section 24I 1 or until they become irrecoverable, with the result that exchange differences in respect of such exchange items should still be taken into account for tax purposes.

See annexure C, example 7. Recoupment of bad debts written off. When a taxpayer recoups amounts in relation to an exchange item in respect of which a loss or a bad debt was claimed and deducted in terms of sections 11 a or 11 ithe total amount recouped by him is included in his taxable income in the year of assessment in which such recoupment occurred.

The recoupment can be broken down into two parts. The first portion is that portion of the amount which was written off in terms of section 11 a or 11 i and which is now recouped. Such portion is recouped in terms of section 8 4 a. The second portion of the stock broker back office software india is the exchange difference, in respect of that portion of the exchange item which was written off but which is now recouped, which should have been calculated had such portion not, for practical purposes, been considered realised for purposes of section 24I, as determined above.

The reason for this is that the debt is an exchange item until the date when it is repaid; the write-off of a bad debt does not constitute repayment, settlement or disposal thereof. Exchange differences which are taken into account in the determination of the taxpayer's taxable income in terms section 24I of the Act, may give rise to or increase an assessed loss.

Any decision of the Commissioner for the South African Revenue Service under section 24I is subject to objection and appeal in terms of section 3 4 of the Act. EXCHANGE ITEMS LOAN, ADVANCE OR DEBT L, A or D FORWARD EXCHANGE CONTRACT FEC FOREIGN CURRENCY OPTION CONTRACT Transaction date Spot rate on transaction date or acquisition rate 1 or. If a related or matching FEC is entered into to hedge the L, A or D and the forward rate ito such FEC was used to record the L, A or D for accounting purposes, such forward rate Forward rate in terms of the FEC Nil rate Date of translation Spot rate on date of translation or If a related or matching FEC is entered into to cover the L, A or D and the forward rate ito such FEC was used to translate the L, A or D for accounting purposes, such forward rate.

Market related forward rate available for the remaining term of the FEC or If the forward rate in terms of the FEC has been used to translate a L, A or D, such forward rate or If a FEC qualifies as an affected contract, such forward rate Rate is determined as follows: Date of realisation Spot rate on date of realisation or disposal rate 2 Spot rate on date of realisation Rate calculated as follows: If the loan, advance or debt is acquired and any consideration paid or payable in respect of the acquisition of such loan, advance or debt was determined by using a rate other that the spot rate on the transaction date, then such other rate defined as the " acquisition rate " in section 24I 1must be used as the ruling exchange rate.

If the loan, advance or debt is disposed of and any consideration received or receivable in respect of the disposal of such loan, advance or debt was determined by using a rate other than the spot rate on the date of realisation, then such other rate defined as " disposal rate " in section 24I 1must be used as the ruling exchange rate. An alternative rate to any of the aforementioned rates may be prescribed by the Commissioner, if such alternative rate is used for accounting purposes in terms of generally accepted accounting practice and such aforementioned rates are inappropriate and inapplicable.

The loan was repayable on The tax year ends on 28 February. MARKET RATES FOR PURPOSES OF THE EXAMPLE DATE SPOT RATE. Transaction date 6, Date of translation 6, Previous date of translation 6, Date of realisation 6, Rand equivalent on transaction date R Rand equivalent on date of realisation R The dollars purchased on were immediately resold at the spot rate.

The taxpayer's financial year ends on 28 February. Two methods of treatment are possible, for tax purposes: Method 1 - The market related forward rate available for the remaining period of the forward exchange contract is used as the ruling exchange rate on the date of translation.

Method 2 - The difference between the forward rate in terms of the forward exchange contract and the spot rate on the transaction date of such contract, is spread over the period of such contract. The portion of such difference which is attributable to the period of such forward exchange contract which has not expired on the date of translation, is added to the spot rate on such date of translation, in order to determine the ruling exchange rate. Transaction date Date of translation 1.

Previous date of translation Date of realisation 6, Rands paid on date of realisation R Rands received on date of realisation R FOREIGN CURRENCY OPTION CONTRACT.

The taxpayer used a market related valuation method for accounting purposes, to value the option at year end. The option was exercised on and the dollars obtained were sold on the same day at the spot rate. MARKET RATES FOR PURPOSES OF THE EXAMPLE DATE. Transaction date 0, Date of translation 0, Previous date of translation 0, Date of realisation 0, Market value of option contract R16 The tax result for the writer of a foreign currency option contract is always exactly the opposite of the result for the holder of such contract.

In this example the tax result for the writer of the foreign currency option contract will therefore be. Exchange difference R5 loss. Premium received R4 gain. Exchange difference R10 loss. Rands paid on transaction date R Rands received on realisation R He took delivery of the stock on On this date he became liable for the purchase price.

The debt was payable on The taxpayer entered into a forward exchange contract on At the end of the financial year date of translation the debt was translated at the spot rate, for accounting purposes. Accounting recording of the transaction. Date of previous translation 6, Cost price of stock on transaction date R At the end of the financial year date of translation the debt was translated at the forward rate, for accounting purposes.

The forward exchange contract was not recorded separately. The premium on the forward exchange contract is included in the cost price of the stock. The premium is therefore indirectly allowed as a deduction for income tax purposes in terms of section 11 a. This exchange difference loss of R12 complies with the provisions of section 24I 5 and the premium portion thereof in this case the full exchange difference must be spread on a day-to-day basis over the period of the forward exchange contract.

Portion of the exchange difference allocated to the year of assessment: Portion of the premium portion of the exchange difference on allocated to the year of assessment: The stock was recorded at spot rate. The premium of R12 complies with the provisions of section 24I 4 b and must be spread on a day-to-day basis over the period of the forward exchange contract.

Ownership was transferred on 10 January date of accrualon shipping of the machine. The company's financial year ends on 28 February. The forward rate was used at year end to translate the debt for accounting purposes. This exchange difference gain complies with the provisions of section 24I 5 and the premium on the forward exchange contract must be spread over the period of the forward exchange contract on a day-to-day basis.

Portion of the exchange difference which is not a premium: Portion of the premium allocated to the year of assessment: Portion of the premium of the exchange difference on allocated to the year of assessment: Selling price of machine on transaction date R1 The amount which could be written off on as irrecoverable in terms of section 11 iis determined by translating the debt at the spot rate on the date of write-off As the debt is written-off as irrecoverable it is for practical purposes considered to have been realised and no further exchange differences will thereafter be taken into account for tax purposes, except in respect of that portion of the amount of the exchange item written-off which is recouped or recovered at a later stage.

Selling price of stock on transaction date R CHANGE IN THE TYPE OF CURRENCY UNIT. The loan was repayable on 31 October Loan payable in German mark. Transaction date 3, Date of translation 3, Previous date of translation 3, Date of realisation 3, When the type of currency in which an exchange item is reflected, is changed, then it is considered to be a realisation of that exchange item and the creation of a new exchange item.

Loan payable in dollars. The new exchange item arises automatically on the realisation of the old exchange item. Rand equivalent on transaction date R 1 Rands paid on date of realisation R1 The company's financial year ends on 31 May. Immediately prior to the commencement of each month the company estimates an average exchange rate at which all export transactions are recorded on the transaction date.

Transaction date Date of translation 6, Date of previous translation Date of realisation 6, It is obvious from this example that the use of an average spot rate makes no difference in the net tax result, on condition that the transactions are in respect of the purchase and sale of trading stock. The borrower is a South African company which manufactures crockery and pottery sets. Interest incurred on the loan at the end of the year DM10 As the kiln had not been brought into use at the end of the year of assessment, all exchange differences shall be postponed and be taken into account in the year the kiln is brought into use for the purposes of the taxpayer's trade.

Portion of exchange difference carried forward to the year of assessment: As DM of the loan of DM was not utilised for the acquisition of the kiln, which qualifies in terms of section 24I 7 a ithat portion of the exchange difference may not be postponed. Portion of exchange difference included in income in the year of assessment: R10 - R7 R2 gain.

Date of previous translation 3, Portion of exchange difference which is carried over from the year of assessment: The kiln was brought into use during the year, for purposes of trade. No further postponement takes place. Interest incurred on the loan during the year DM10 Rand equivalent of loan on transaction date R1 Rands used to repay the loan of DM The expected completion date of the plant was 1 February The debt became due on completion of the contract and had to be settled immediately.

On 1 October the company entered into a forward exchange contract in order to hedge the current Rand-cost of the plant against future exchange rate movements, namely: For purposes of the example the expenditure is considered to have been incurred on the date the contract was completed, i. The plant was brought into use on 10 March MARKET RATES FOR PURPOSES OF THE EXAMPLE DATE SPOT RATE FORWARD RATE.

As the contract had not been completed, it is considered, for purposes of the example, that the debt had not been incurred and therefore no exchange difference is to be calculated. Transaction date 5, Date of realisation 5, Section 24I 7 provides inter alia that, to the extent that a forward exchange contract was entered into to serve as a hedge for a debt to be incurred for the utilisation thereof to acquire, for example plant and machinery, the exchange difference arising from the forward exchange contract is to be carried forward until the plant and machinery has been brought into use for purposes of the taxpayer's trade.

Furthermore, section 24I 7 contains a proviso which makes that section subject to the provisions of section 36 of the Act. However, as no capital expenditure has been incurred during the current year of assessment in terms of section 15 read with section 36, that proviso is not yet operative and the carry-forward of the exchange difference remained valid. Portion of exchange difference included in income n the current year of assessment: R - R 3 gain.

Tax calculation on Loss before these transactions R No capital expenditure was incurred. Portion of exchange difference which is carried over rom the year of assessment: The mineral processing plant had still not been taken into use for purposes of trade, but, because the acquisition cost of the plant was incurred as capital expenditure in this year the proviso in section 24I 7 becomes operative and the exchange difference is not postponed further.

Income before these transactions R1 Forward exchange contract R Assessed loss brought forward from previous year R The exchange differences relating to the forward exchange contract. Section 36 deduction R Acquisition cost of plant R21 Utilised this year R Carried forward to R20 The acquisition cost of the plant was incurred in this year. COST OF MINERAL PLANT. NET TAX RESULT Exchange differences. Cost of mineral plant R21 He took delivery of the stock onon which date he became liable for the purchase price.

The taxpayer took out a forward exchange contract on Date of translation 5, This exchange difference is determined by using the spot rate as the ruling exchange rate on the transaction date and the forward rate as the ruling exchange rate on the date of translation.

This exchange difference therefore complies with one of the four possible circumstances, as envisaged in section 24I 5 and the premium portion of that exchange difference must be spread, on a day-to-day basis, over the period of the forward exchange contract. Forward rate ] x Foreign currency amount. Portion of the premium deductible on Portion of the exchange difference which is not the premium portion: R9 - R4 R5 loss.

The portion of the exchange difference which is not a premium represents the exchange gain or exchange loss which arose during the period for which the loan, advance or debt was not hedged by the forward exchange contract. Date of previous translation 5, The loan complies with all the requirements for a qualifying exchange item. Therefore any exchange difference arising from such loan is spread in terms of section 24I 7A a. Portion of exchange difference deductible from income in the year of assessment: Exchange difference to be deducted in following years: Three alternatives are available for dealing with the conversion of the dollar loan to a loan in pound sterling, depending on the rates applied.

The different alternatives do, however, have the same result. Date of deemed realisation 3, Deferred amount of exchange differences to be deducted in following years: Deferred amount of exchange difference to be deducted in following years: As the portion of the loan which is repaid is not a qualifying exchange item, the provisions of section 24I 7A do not apply and the full exchange difference calculated must be brought into account as taxable income.

Unclaimed exchange differences brought forward from previous year: Reduction in terms of s 24I 7A d i deductible in current year: Rands received on transaction date R Balance of deferred exchange differences on R12 Rand equivalent of loan on R The cost of the stock was determined on 28 February by using the spot rate on that date, in accordance with the principles laid down in the case of Caltex Oil SA Ltd v CIR 1 SA AD 37 SATC 1.

All the stock was sold by 28 February In the above-mentioned court case, the court held that, where a debt in respect of imported stock was still outstanding at the end of the year of assessment in which such debt was incurred, the cost of such imported stock must be determined by using the ruling spot rate at the end of such year of assessment.

MARKET RATES FOR PURPOSES OF THE EXAMPLE Outstanding. Transaction date 2, Day prior to date of commencement 3, A portion of this transitional exchange difference has already been taken into account for tax purposes in that the cost of stock was determined on 28 February at the spot rate on such date.

Portion of the transitional exchange difference already taken into account for tax purposes: Value of debt on transaction date R2 Increased deduction R Adjusted transitional exchange difference: The transitional exchange difference is taken into account for tax purposes, in terms of the phasing in provisions of section 24I 3: R Portion of transitional exchange difference unrealised at the end of the first year of assessment after the date of commencement: Any exchange difference in respect of that portion of the debt which was still outstanding at the beginning of the first year of assessment ending on or after 1 January the commencement date of section 24Iarising after such date, must be brought into account in terms of that section as a normal exchange difference.

See calculation above R loss. Date of first translation 3, See calculation in table above R60 loss. Cost price of stock on transaction date R2 ROLL-OVER OF A FORWARD EXCHANGE CONTRACT. The vehicle was to be delivered and brought into use in May The company entered into a forward exchange contract on 1 May In other words the first forward exchange contract was rolled over. Transaction date 4, Exchange difference postponed in terms of section 24I 7 a to year of assessment: Forward exchange contract 1.

Exchange difference postponed in terms of section 24I 7 b to year of assessment: Forward exchange contract 2. Date of translation market-related rate 5, Exchange difference postponed in terms of section 24I 7 a to the year of assessment: Exchange difference postponed in terms of section 24I 7 b to the year of assessment: Exchange difference carried forward from the and years of assessment: Cost price of a vehicle on 1 May R Rands received on realisation of first forward.

AFFECTED CONTRACT IN RESPECT OF INTEREST. The company entered into a forward exchange contract on 1 July The company recorded the transaction at forward rates. Date of realisation 4, Date of translation 4, Debt interest incurred until Although interest accrues fromthe transaction date is assumed to be As the forward rate of the forward exchange contract was used to record the debt and interest incurred and the forward exchange contract qualifies as an affected contract in respect of the interest not yet incurred at the end of the year of assessment, the forward rate in terms of the forward exchange contract may be used as the ruling exchange rate on translation of the forward exchange contract, in terms of paragraph b ii of the definition of "ruling exchange rate".

Debt balance outstanding as atpaid on Date of previous translation 4, Debt interest accrued frompaid on The effect of the application of the forward rate to translate the affected forward exchange contract is that the net exchange difference on the transaction is nil. The bank's financial year ends at the end of February. MARKET RATES FOR PURPOSES OF THE EXAMPLE. The market related forward rates for the remaining periods of the forward exchange contract are determined on each date of translation by dividing the premium in respect of that forward exchange contract, over the period thereof, on a straight line basis see method 2 in example 2.

The net exchange difference represents the gain made, which is evenly spread over the period of the forward exchange contract. This is the longest practice note issued to date. Page numbers have been deleted, hyperlinks added, and the format of the examples changed slightly. Although it still has rough edges it is an intriguing alternative to Microsoft Office Professional. Find out more at www. First ruling exchange rate. Second ruling Exchange rate.

Spot rate on the transaction date. Spot rate on previous date of translation end of preceding year of assessment. 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.

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. LOAN, ADVANCE OR DEBT L, A or D. FORWARD EXCHANGE CONTRACT FEC. Spot rate on transaction date or acquisition rate 1 or If a related or matching FEC is entered into to hedge the L, A or D and the forward rate ito such FEC was used to record the L, A or D for accounting purposes, such forward rate.

Forward rate in terms of the FEC. Spot rate on date of translation or If a related or matching FEC is entered into to cover the L, A or D and the forward rate ito such FEC was used to translate the L, A or D for accounting purposes, such forward rate. Market related forward rate available for the remaining term of the FEC or If the forward rate in terms of the FEC has been used to translate a L, A or D, such forward rate or If a FEC qualifies as an affected contract, such forward rate.

Rate is determined as follows: Spot rate on date of realisation or disposal rate 2. Spot rate on date of realisation. Rate calculated as follows: Normal loan dollar obligation. Foreign currency option contract.

Acquisition and disposal of a debt dollar asset. Debt dollar obligation hedged by a forward exchange contract. Debt receivable in dollars hedged by a forward exchange contract for a portion of the period. Debt receivable in dollars which has become irrecoverable, was written off and then partially recovered.

Change in the type of currency unit. Use of average spot rates to record debts for accounting purposes. Identification of the premium or discount portion of an exchange difference in terms of section 24I 5.

Deferral of exchange differences in respect of a qualifying loan or advance. Roll-over of a forward exchange contract. Affected contract in respect of interest. Illustration of how, for tax purposes, a gain made between a forward exchange contract and an underlying position is taken into account, by using the market related forward rate. Previous date of translation Date of realisation. The premium on the forward exchange contract is included in the cost price of the stock which is taken into account as a deduction for tax purposes in terms of sections 11 a and Accounting recording of the transaction Dr Purchases Stock R Dr Premium on forward exchange contract R 12 Cr Creditor R Although the creditor was recorded at the forward rate, the cost price of the stock purchased was fixed at the spot rate.

Date written off 6, Date recovered 6, Exchange difference: Transaction date Date of translation. Date of previous translation Date of realisation. FORWARD RATE contract period. SPOT RATES FOR PURPOSES OF THE EXAMPLE. Portion of transitional exchange difference unrealised at the end of the first year of assessment after the date of commencement: