News Column

A little light on forex gains and losses

January 22, 2014

Section 24(I)(10) of the Income Tax Act deals with unrealised foreign exchange gains or losses between a South African resident taxpayer and a foreign connected person. For the purposes of section 24(I)(10), the unrealised foreign exchange gains or losses arising in the course of trade were disregarded for income tax purposes. The foreign gains or losses were included as part of taxable income only upon realisation of the exchange item - for example, repayment of the loan or settlement with a related party creditor. The new section 24I(10A) similarly provides for the exclusion of unrealised foreign exchange differences from the tax calculation. However, the new section has different requirements and as a result exchange items that fall into section 24I(10) may not necessarily be covered by section 24I(10A). Section 24(I)(10A) will apply to debts between parties forming part of the same group of companies or who are connected persons as defined, but will not apply to the following debts: (i) Exchange items that represent current assets and liabilities in terms of International Financial Reporting Standards. (ii) Exchange items hedged by foreign exchange contracts or foreign currency option contracts. (iii) Exchange items that are directly or indirectly funded by debt owed to an unconnected person who falls outside the group of companies. Section 24(I)(10A) is applicable for years of assessment commencing on or after January 1, 2013 . Assuming that a taxpayer has a December 31 year-end, this means the new section will apply as from the year ending December 31, 2013 . So, for many companies, this amendment is in play. The transition from the old section 24(I)(10) to the new section 24I(10A) has been provided for by way |||of a deemed realisation of exchange items falling into section 24I(10). The deemed realisation is intended to take place on the last day of the first year of assessment that section 24I(10A) applies (that is, years of assessment commencing on or after January 1 , 2013). With regard to the deemed realisation, it is important to note that: l To the extent that the exchange difference arising from this deemed realisation falls within the new section 24I(10A) application, it would be ignored for income tax purposes. l To the extent that the exchange difference arising from the deemed realisation does not fall into the new section 24I(10A), the taxpayer would have to include or deduct from income a foreign exchange gain or loss as at the deemed realisation date. From the above, it is important with regard to related party loans to identify the year-end when the deemed realisation catered for in the transition from section 24I(10) to section 24I(10A) will be triggered, and determine whether any foreign exchange gains or losses will have to be recognised for income tax purposes. The above may have an impact on your taxable income and related provisional tax payments. l Bosch is the tax manager at KPMG . Contact him at The Mercury

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Source: Mercury, The (South Africa)

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