Section 24I of the Income Tax Act 58 of 1962 was introduced to deal with foreign exchange gains and losses on any unit of currency on hand, debts due to or by a taxpayer, forward exchanges contacts, and forward currency option contracts.
Where a debt is therefore due to a South African taxpayer (not a money-lender) in a foreign currency, all exchange differences, whether realised or unrealised, are taken into account by the taxpayer either as a deduction or inclusion in calculating taxable income. Where the debt is written off by the taxpayer, no deduction is allowed in relation to the previously recognised foreign exchange gains that were included in gross income. The loan due to the taxpayer represents a capital asset and therefore when the loan is written off the loss is capital in nature. No deduction can be claimed under section 11(i) of the Income Tax Act, as the foreign currency loan was never included in gross income of the taxpayer.
The new section 24I(4) seeks to remedy this situation. In terms of section 24I(4)(a) and (b) the taxpayer has to deduct from income current and previous exchange gains included in income and include in income current and previous exchange losses, which is calculated with reference to the balance of the debt which is written off. Exchange differences on the realised portion of the debt are not taken into account under section 24I(4).
NATIONAL TREASURY EXAMPLE
Company A, a South African resident, advanced a loan of $100 to Company B, a USA resident, on 1 January 2015. The loan is of a capital nature from Company A’s perspective. Company B repaid $40 of the debt on 31 December 2015. At the end of the second year of assessment it was clear Company B would not be able to repay the balance of the loan of $60. Company A wrote the balance of $60 off as bad on 31 December 2016. The exchange rates at the respective dates were: 1 January 2015: $1 = R14; 31 December 2015: $1 = R16; and 31 December 2016: $1 = R12.
Results: Company A
First year of assessment: 31 December 2015
Foreign exchange gain included in income under section 24I(3)(a) on realisation of part of the debt [40 X (14 -16)] = R80
Foreign exchange gain included in income under section 24I(3)(a) on translation of the balance of the debt of $60 [60 X (14 -16)] = R120
Second year of assessment: 31 December 2016
Foreign exchange loss deducted from income under section 24I(3)(a) [60 X (16-12)] = R240
Deduction of previous foreign exchange gains included in income under section 24I(4)(a) = R120
Inclusion in income of previous foreign exchange losses deducted from income under section 24I(4)(b) = R240
While it is accepted that the introduction of section 24I brings about fairness, it is interesting to note that the introduction took effect during a time when the rand was strengthening against major foreign currencies. This gives rise to unrealised foreign losses on debts due to taxpayers and when these debts are written off taxpayers will have to include in income current and previous unrealised exchange losses.
The new section 24I(4) is effective from 1 January 2017 and applies in respect of years of assessment ending after that date.
Muneer Hassan CA(SA) is a Tax Consultant, Senior Lecturer in Taxation at UJ and Lecturer on the Gauteng Board Course