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Summary A Student's Approach to Income Tax - Taxation of business activities and Individuals (TAX3761)
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NOTES AND SUMMARY OF CHAPTER 8
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Summary A Student's Approach to Income Tax - Taxation of business activities and Individuals (TAX3761)
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Chapter 8 – Specificdeductions and allowances
Foreign Exchange Transactions (Section 1,24I and 25D)
Taxpayer sometimes buys an asset or trading stock from an overseas supplier and pays for it in
foreign currency. The purchase sum must then be translated into SA currency to determine the
purchase sum for normal tax purposes.
Consists of two parts Underlying asset (non-monetary item) and exchange item (monetary
item)
,SECTION 25D:
The translation of the purchase sum must be made at the spot rate, since section 25D determines
that expenditure incurred in a foreign currency must be translated by applying the spot rate on the
transaction date. For purposes of section 25D the transaction date is the date on which the
expenditure or loss is actually incurred, in other words, the date on which there is an unconditional
liability to pay the outstanding amount.
SECTION 24I:
Requires that all gains and losses on foreign exchange transactions, irrespective of whether realised
or not and irrespective of whether of a capital nature or not, be included in the determination of
taxable income.
Definitions
‘Spot rate’ is the appropriate quoted exchange rate, at a specific time, by an
authorised dealer in foreign exchange for the delivery of currency.
‘Average exchange rate’ in relation to a year of assessment means the average,
determined by using the closing spot rate, at the end of the daily or monthly intervals, during the year
of assessment, consistently applied.
‘Foreign exchange transactions’ are transactions involving foreign currencies,
An ‘exchange difference’ is:
• the foreign exchange gain or loss;
• in respect of an exchange item;
• arising during a year of assessment; and
• determined by multiplying the exchange item by the difference
Computation of exchange differences
To compute the foreign exchange, gain or loss that must be included or deducted
from income, the exchange item must be multiplied by the difference between the
ruling exchange rates on:
• the transaction date;
• the translation date (if the exchange item has not been settled at the end of the year
of assessment); and
• the realisation date.
, Acquisition of assets:
Section 24I(7) provides that an exchange difference that relates to the acquisition of certain assets
must be deferred and included in taxable income in the year of assessment during which the asset is
brought into use for trade purposes.
The provisions of Section24I(7) apply to:
• An exchange differences arising from a loan,advance or debt
• That has been used in the acquisition ,installations, erection or construction
• Of any machinery ,plant,
Proviso
If the Commissioner is satisfied that during a subsequent year of assessment:
• the loan, advance or debt to be obtained or incurred will no longer be obtained or
incurred;
• the loan, advance or debt has not been used as contemplated above; or
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