Foreign Exchanges Flashcards
must we translate general expenses or incomes at either the spot rate or the average rate?
Section 25D of the Income Tax
- you must translate at either but you need to stick with the one you choose, however this only applies if you are a natural person
- if you are a company, I think you have to do it at the spot rate?
How does the 6quin credit work?
What must be done when you exchange assets for an asset or money that is in foreign currency?
Para 43(1A)
- translate at lower of spot rate or average year of assessment rate and the expenditure (whichever gives you less tax)
How does section 24I work and when is it relevant?
Section 24I of the ITA
- this section specifies that we need to included all realised gains and losses in taxable income that occur from EXCHANGE ITEMS(assets and things sold) and any unrelised gains (like if you have a foreign currency asset, its worth something else now at year end probably, now you include the gain or loss from the change in value
- the section only applies if the item meets the definition in the section of an excahnge item
- The exchange gain or loss is calculated by multiplying the exchange item in foreign currency against the difference in the exchange rates on the different but relevant dates
- the relevant dates could be any of the following
> transaction date ( the day you get it)
> realization date ( if it is sold)
> translation date ( if it is not sold but reach end of year of assessment)
- we must also include or deduct any premium or consideration (in terms of s25D) in order to acquire the exchange item (mostly for a contract)
- HOWEVER, if the contract is an affected contract, different rules apply, an affected contract is any foreign currency option contract or forward exchange contract which was entered into to serve as a hedge in repect of a debt where
> the debt was for the purpose of carrying on a trade by:
* acquiring any asset OR
* for financing any expenditure OR
* the sale of any asset OR
* supply of any services
AND
> the debt has not yet been incurred in that current year of assessment (we haven’t delivered our part in order to be entitled to the payment or maybe they havent delivered)
- with regards to what rates to use when
> foreign exchange contract
* transaction date - forward rate (rate which you will translate your money in the contract)
* translation date - market related forward rate
* realisation date - spot rate
> affected foreign exchange contract
* transaction date - forward rate( the rate at which you will translate your money in the contract)
* translation date - forward rate
* realisation date - spot rate
> foreign currency option contract
* transaction date - nil value (unless you exercise it, then it is the forward rate of the contract
* translation date - (Market value if option contract divided by foreign currency amount as stipulated in contract)
* realization date - (Market value if option contract divided by foreign currency amount as stipulated in contract)
> affected foreign currency option contract
* transaction date - nil value (unless you excercise the contract, then it is the forward rate)
* translation date - (Premium[acquisition cost] divided by foreign currency amount as stipulated in contract)
* realization date - (Market value if option contract divided by foreign currency amount as stipulated in contract)
> the reason why the option contracts have a nil value sometimes is because you need to exercise the option for it to have a value, it will only be excerised if it is profitable for that person
- every other type of debt balance from exchange items(like the debt that the option contract was taken out on!!!) can just be translated using the spot rate
- HOW TO MAKE SENSE OF THIS, now you need to realise that with these FECs snd FCOCs you need to get the difference in rands of the difference rates, and that amount gets included/ deducted in your taxable income
- The proviso to section 24I(2) restricts the application of section 24I to persons who are residents, CFCs (controlled foreign companies) or non-residents to the extent the exchange items are attributable to that non-resident’s permanent establishment in South Africa
- section 24I(4) says that if the debt goes bad, basically you need to just reverse all the gains and losses that arose from the debt
- (8) - no foreign exchange loss deduction or premium deduction allowed if it was only entered into for the sake of tax benefits
- (12) - When 24I starts applying to a person, then the exchange item is deemed to be acquired at that date and then, when the section stops applying, they are deemed to have realised it
- (7) - exchange differences arising on items that are tanglible property, related property and intellectual property will only be deductible or includeable in the year that the asset is brought into use (IN OTHER WORDS, IT IS DEFERRED, NOT FORGOTEEN)
- but it will be forgotten if
- the debt will no longer be incurred
- the debt is not used for the acquisiton of the asset
- the asset will not be brouht into use for the tax payer’s trade
- (10A) - exchange differences are disregarded if they are connected persons (if they own 20% equity and are a natural person, 50% for company, they are connected persons) AND
- doesnt need to be reported in terms of IFRS AND dont form part of the same group of companies
What does Section 25D say?
section 25D of the ITA
- income and expenses must be translated into rands using the spot rate
- however natural persons and non-trading trusts can choose between the spot rate and the average rate, but the one you choose must be applied to al items
- then for permanent establishments situated outside south africa, we must do the following
* determine their taxable income in their functional currency
* translate the taxable income into rands using the AVERAGE exchange rate for the year of assessment
* if the foreign country is in the common monetary area
What does Para 43 of the eighth schedule say?
Para 43 of 8th Sch of ITA
- it applies when assets are disposed of or acquired in foreign currency, eg
* asset bought in local currency but sold in foreign currency
* asset brought in foreign currency and sold in local currency
* asset bought in foreign currency and sold in another currency
- the cost is converted into rands in the year of disposal and acquisition by using the spot or the average rate, doesnt have to be the same rate for both either
- (1) - CGT is only calculated on the real gain or loss and not on the foreign gain or loss
- (1A) - CGT is calculated on both??? huh
What does sub section 10A of 24I say?
- If the following requirements are met, then no exchange rate difference needs to be included in the taxable income of the companies
- Companies are part of the same group of companies
- Companies arent holding any FEC or FCOC
- No portion of the loan represents a current liability
- No indication that the loan is funded directly or indirectly from outside the group
When is the date that the entity acquires the asset for foreign exchange rate purposes?
On the day that the rights and rewards pass to the entity, which will depend on the method they are using, FOB and etc, NOTE that it is not the day that the deal is concluded.
