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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

24I. Gains or losses on foreign exchange transactions

 

(1) For the purposes of this section—

 

"acquisition rate"

means the exchange rate in respect of an exchange item obtained by dividing the amount of the expenditure incurred for the acquisition of such exchange item by the foreign currency amount in respect of such exchange item;

 

"affected contract"

means any foreign currency option contract or forward exchange contract, which has been entered into by any person during any year of assessment to serve as a hedge in respect of a debt, where—

(a) such debt has not yet been incurred by or the amount payable in respect of such debt has not yet accrued to, such person, during such year of assessment; and
(b) such debt—
(i) is to be utilized by such person to acquire any asset or to finance any expense; or
(ii) will arise from the sale of any asset or the supply of any services,

in the ordinary course of the person's trade in terms of an agreement entered into by such person prior to the end of such year of assessment;

[Definition substituted by section 53(1)(a) of Act No. 22 of 2012]

 

"disposal rate"

means the exchange rate in respect of an exchange item obtained by dividing the amount received or accrued in respect of the disposal of such exchange item by the foreign currency amount in respect of such exchange item;

 

"exchange difference"

means the foreign exchange gain or foreign exchange loss in respect of an exchange item during any year of assessment determined by multiplying such exchange item by the difference between

(a) the ruling exchange rate on transaction date in respect of such exchange item during that year of assessment, and—
(i) the ruling exchange rate at which such exchange item is realised during that year of assessment; or
(ii) the ruling exchange rate at which such exchange item is translated at the end of that year of assessment; or
(b) the ruling exchange rate at which such exchange item was translated at the end of the immediately preceding year of assessment or at which it would have been translated had this section been applicable at the end of that immediately preceding year of assessment, and—
(i) the ruling exchange rate at which such exchange item is realised during that year of assessment; or
(ii) the ruling exchange rate at which such exchange item is translated at the end of that year of assessment;

 

"exchange item"

of or in relation to a person means an amount in a foreign currency—

(a) which constitutes any unit of currency acquired and not disposed of by that person;
(b) owing by or to that person in respect of a debt incurred by or payable to such person;
(c) owed by or to that person in respect of a forward exchange contract; or
(d) where that person has the right or contingent obligation to buy or sell that amount in terms of a foreign currency option contract;

 

"foreign currency"

in relation to any exchange item of a person, means any currency which is not local currency

 

"foreign currency option contract"

means any agreement in terms of which any person acquires or grants the right to buy from or to sell to any other person a certain amount of a nominated foreign currency on or before a future expiry date at a specified exchange rate;

 

"forward exchange contract"

means any agreement in terms of which any person agrees with another person to exchange an amount of currency for another currency at some future date at a specified exchange rate;

 

"forward rate"

means tile specified exchange rate as referred to in the definition of "forward exchange contract";

 

"intrinsic value",

in relation to a foreign currency option contract, means the value for the holder or writer thereof, as the case may be, determined by applying the difference between—

(a) the spot rate on translation date or the date on which the foreign currency option contract is realised, as the case may be; and
(b) the option strike rate,

to the amount of foreign currency as specified in such foreign currency option contract: Provided that such foreign currency option contract shall have a nil value for the holder or writer thereof if such holder thereof would have sustained a loss had he exercised his right in terms of such foreign currency option contract on such translation date or date realised due to the unfavourable difference between the option strike rate and the spot rate on such translation date or date realised;

 

"local currency"

means in relation to —

(a) any person in respect of an exchange item which is attributable to any permanent establishment outside the Republic, the functional currency of that permanent establishment: Provided that for purposes of this paragraph any exchange item shall be deemed not to be attributable to any such permanent establishment if the functional currency that permanent establishment is the currency of a country which has an official rate of inflation of 100 per cent or more throughout the relevant year of assessment.
(b) any resident other than a headquarter company in respect of an exchange item which is not attributable to a permanent establishment outside the Republic, the currency of the Republic;
(c) any person that is not a resident in respect of any exchange item which is attributable to a permanent establishment in the Republic, the currency of the Republic;
(d) any headquarter company in respect of an exchange item which is not attributable to a permanent establishment outside the Republic, the functional currency of that headquarter company;
(e) any domestic treasury management company in respect of an exchange item which is not attributable to a permanent establishment outside the Republic, the functional currency of that domestic treasury management company;
(f) any international shipping company defined in section 12Q, in respect of an amount which is not attributable to a permanent establishment outside the Republic, the functional currency of that international shipping company;

 

"market value",

in relation to a foreign currency option contract, means—

(a) in the case of a person who for accounting purposes uses a market-related valuation method in terms of a practice consistently applied by him to determine the value of all his foreign currency option contracts, the market-related value so determined; or
(b) in the case of any other person, the intrinsic value of such foreign currency option contract;

 

"option strike rate"

means the specified exchange rate as referred to in the definition of "foreign currency option contract";

 

"premium or discount on a forward exchange contract"

[Definition deleted by section 44(a) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

"realised"

means, in relation to an exchange item, where such exchange item is—

(a) a debt in any foreign currency, when and to the extent to which payment is received or made in respect of such debt, or when and to the extent to which such debt is settled or disposed of in any other manner;
(b) a forward exchange contract, when payment is received or made in respect of such forward exchange contract;
(c) a foreign currency option contract, when payment is received or made in respect of the right in terms of such foreign currency option contract having been exercised, or when such foreign currency option contract expires without such right having been exercised, or when such foreign currency option contract is disposed of; or
(d) an amount which constitutes a unit of currency, when that amount is disposed of;

 

"ruling exchange rate"

means, in relation to an exchange item, where such exchange item is—

(a) a debt in a foreign currency on—
(i) transaction date, the spot rate on such date,
(ii) the date it is translated, the spot rate on such date, or
(iii) the date it is realised, the spot rate on such date:

Provided that where the rate prescribed in respect of a debt in terms of this definition is the spot rate on transaction date or the spot rate on the date on which such debt is realised, and any consideration paid or incurred or received or accrued in respect of the acquisition or disposal of such debt was determined by applying a rate other than such spot rate on transaction date or date realised, such spot rate shall be deemed to be the acquisition rate or disposal rate, as the case may be;

(b) a forward exchange contract on—
(i) transaction date, the forward rate in terms of such forward exchange contract;
(ii) the date it is translated, the market-related forward rate available for the remaining period of such forward exchange contract, or in respect of a forward exchange contract which is an affected contract, the forward rate in terms of such forward exchange contract;
(iii) the date it is realised, the spot rate on such date; or
(c) a foreign currency option contract on—
(i) transaction date, a nil rate;
(ii) the date it is translated—
(aa) in relation to a foreign currency option contract which is not an affected contract, the rate obtained by dividing the market value of such foreign currency option contract on that date by the foreign currency amounted as specified in such foreign currency option contract; or
(bb) in relation to a foreign currency option contract which is an affected contract, the rate obtained by dividing any amount included or deducted, as the case may be, in terms of subsection (3)(b) by the foreign currency amount, as specified in such affected contract;
(iii) the date it is realised, the rate obtained by dividing the market value of such foreign currency option contract on that date by the foreign currency amount as specified in such foreign currency option contract: Provided that where such foreign currency option contract is realised by the disposal thereof, the rate shall be obtained by dividing the amount received or accrued as a result of the disposal of such foreign currency option contract, by the foreign currency amount as specified in such foreign currency option contract:
(iv) [subparagraph (iv) deleted by section 11(1)(c) of Act No. 140 of 1993];
(d) an amount which constitutes a unit of currency, on –
(i) transaction date, the spot rate on that date;
(ii) the date it is translated, the spot rate on that date; or
(iii) the date it is realised, the spot rate on that date:

Provided that the Commissioner may, having regard to the particular circumstances of the case, prescribe an alternative rate to any of the aforementioned prescribed rates to be applied by a person in such particular circumstances, if such alternative rate is used for the purposes of financial reporting pursuant to IFRS;

[Proviso amended by section 44(b) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

"transaction date"

means, in relation to—

(a) [Deleted by the Taxation Laws Amendment Act, 2012 (Act No. 22 of 2012)]
(b) a debt owing by a person, the date on which such debt was actually incurred;
(c) [Deleted by the Taxation Laws Amendment Act, 2012 (Act No. 22 of 2012)]
(d) a debt owing to a person, the date on which the amount payable in respect of such debt accrued to such person or the date on which such debt was acquired by such person in any other manner;
(e) a forward exchange contract, the date on which such contract was entered into;
(f) a foreign currency option contract, the date on which such contract was entered into or acquired; and
(g) an amount which constitutes a unit of currency, the date on which that amount was acquired;

 

"translate" means the restatement of an exchange item in the local currency at the end of any year of assessment by applying the ruling exchange rate to such exchange item.

 

(2) The provisions of this section shall apply in respect of any—
(a) company;
(b) trust carrying on any trade;
(c) natural person who holds any amount contemplated in paragraph (a) or (b) of the definition of ‘exchange item’ as trading stock; and
(d) natural person or trust in respect of any amount contemplated in paragraph (c) or (d) of the definition of ‘‘exchange item":

Provided that this section does not apply in respect of any exchange item of a person who is not a resident (other than a controlled foreign company), unless that exchange item is attributable to a permanent establishment of that person in the Republic.

 

(3) In determining the taxable income of any person contemplated in subsection (2), there shall be included in or deducted from the income, as the case may be, of that person—
(a) any exchange differences in respect of an exchange item of or in relation to that person, subject to subsection (10A); and
(b)
(i) any premium or like consideration received by, or paid by, such person in terms of a foreign currency option contract entered into by such person; or
(ii) any consideration paid by such person in respect of a foreign currency option contract acquired by such person;
(c) [deleted by section 38 of Taxation Laws Amendment Act No. 17 of 2009]:

 

(4) Subject to section 11, in determining the taxable income of any person contemplated in subsection (2) in respect of a debt owing to that person as referred to in paragraph (b) of the definition of exchange item, to the extent that it has become bad—
(a) the amount of any foreign exchange gain, relating to that debt, that is or was included in the income of that person in the current or any previous year of assessment must be deducted from the income of that person; and
(b) the amount of any foreign exchange loss, relating to that debt, that is or was deducted from the income of that person in the current or any previous year of assessment must be included in the income of that person.

[Subsection (4) inserted by section 44(1) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - effective 1 January 2017]

 

(5) [Subsection (5) deleted by the Taxation Laws Amendment Act, 2008 (Act No. 3 of 2008)]

 

(6) Any inclusion in or deduction from income in terms of this section shall be in lieu of any deduction or inclusion which may otherwise be allowed or included under any other provision of this Act.

 

(7) Notwithstanding the provisions of subsection (3), but subject to the provisions of section 36
(a) any exchange difference arising from a debt having been utilised by a person in respect of—
(i) the acquisition, installation, erection or construction of any machinery, plant, implement, utensil, building or improvements to any building, as the case may be; or
(ii) the devising, developing, creation, production, acquisition or restoration of any invention, patent, design, trade mark, copyright or other similar property or knowledge contemplated in section 11(gA),  or (gC)  as the case may be;
(b) any exchange difference arising from a forward exchange contract or a foreign currency option contract which has been entered into by a person contemplated in paragraph (a), to the extent to which such forward exchange contract or foreign currency option contract is entered into to serve as a hedge in respect of a debt incurred or to be incurred for the utilisation thereof as contemplated in paragraph (a); and
(c) any premium or other consideration paid or payable in respect of or in terms of a foreign currency option contract entered into or acquired by a person contemplated in paragraph (a), to the extent to which such foreign currency option contract is entered into or obtained in order to serve as a hedge in respect of a debt incurred or to be incurred for the utilisation thereof as contemplated in paragraph (a),

shall, where such exchange difference arose or such premium or other consideration was paid or became payable in a year of assessment prior to the year of assessment during which such machinery, plant, implement, utensil, building, improvements to any building, invention, patent, design, trade mark, copyright or other similar property or knowledge was or is brought into use for the purposes of such person's trade, be carried forward and be taken into account in the determination of the taxable income of such person in the year of assessment during which such machinery, plant, implement, utensil, building, improvements to any building, invention, patent, design, trade mark, copyright or other similar property or knowledge was or is so brought into use for the purposes of such person's trade: Provided that where during any year of assessment subsequent to the year of assessment during which such exchange difference arose or such premium or other consideration was paid or became payable—

(a) the debt to be incurred as contemplated in paragraph (b) or (c)of this subsection will no longer be so incurred;
(b) such debt has not been utilized as contemplated in paragraph (a); or
(c) any such asset, property or knowledge will no longer be bought into use for the purpose of such person's trade,

such exchange difference or premium or other consideration shall no longer be carried forward, but shall be taken into account in the determination of such persons taxable income in such subsequent year of assessment.

[Subsection (7) amended by section 44(c) and (d) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(7A) [Subsection (7A) was deleted by the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013) Government Gazette 37158 dated 12 December 2013]

 

(8) Any foreign exchange loss sustained in respect of a transaction entered into by a person, or any premium or other consideration paid in respect of or in terms of a foreign currency option contract entered into or acquired by a person, shall not be allowed as a deduction from such person's income under subsection (3), if such transaction was entered into or such foreign currency option contract was entered into or acquired solely or mainly to enjoy a reduction in tax by way of a deduction from income.

 

(9) [Subsection (9) deleted by Revenue Laws Amendment Act No. 31 of 2005]

 

(10) [Subsection (10) deleted by the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013) Government Gazette 37158 dated 12 December 2013]

 

(10A)        

(a) Subject to paragraph (b), no exchange difference arising during any year of assessment in respect of an exchange item contemplated in paragraph (b) of the definition of 'exchange item' shall be included in or deducted from the income of a person in terms of this section—
(i) if, at the end of that year of assessment—
(aa) that person and the other party to the contractual provisions of that exchange item—
(A) form part of the same group of companies; or
(B) are connected persons in relation to each other; and
(bb) no forward exchange contract and no foreign currency option contract has been entered into by that person to serve as a hedge in respect of that exchange item; and

(ii)        that exchange item—

(aa) or any portion thereof does not represent for that person a current asset or a current liability for the purposes of financial reporting pursuant to IFRS; and
(bb) is not directly or indirectly funded by any debt owed to any person that—

(A)        does not form part of the same group of companies as; or

(B)        is not a connected person in relation to,

that person or the other party to the contractual provisions of that exchange item.

[Subsection (10A) substituted by section 40 of Act No. 43 of 2014]

(b) Where paragraph (a) was applied during any year of assessment to any exchange difference in respect of an exchange item and—
(i) that exchange difference was not included in nor deducted from the income of a person in that year of assessment; and

(ii)        during any year of assessment—

(aa) subsequent to that year of assessment, paragraph (a) no longer applies to that exchange difference; or
(bb) that exchange item is realised,

an amount in respect of that exchange item must be included in or deducted from the income of that person in that subsequent year of assessment or in the year of assessment during which the exchange item is realised which amount shall be determined by multiplying that exchange item by the difference between the ruling exchange rate on the last day of the year of assessment immediately preceding that subsequent year of assessment and the ruling exchange rate on transaction date, less any amount of the exchange differences included in or deducted from the income of that person in terms of this section in respect of that exchange item for all years of assessment preceding that subsequent year of assessment during which the person was a party to the contractual provisions of the exchange item.

 

(11) [Subsection (11) deleted by the Taxation Laws Amendment Act, 2012 (Act No. 22 of 2012)]

 

(11A) [Subsection (11A) was deleted by the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013) Government Gazette 37158 dated 12 December 2013]

 

(12) Where a person holds any exchange item and the provisions of this section at any time during a year of assessment –
(a) become applicable to that person, that exchange item shall be deemed to have been acquired at that time for the purposes of this section; or
(b) cease to apply to that person, that exchange item shall be deemed to have been realised at that time for the purposes of this section.