The South African Revenue Service has published Interpretation Note 101, which provides guidance on the interpretation and application of section 24I of the Income Tax Act of 1962. Section 24I deals with the income tax treatment of foreign exchange gains and losses on exchange items as well as premiums or like consideration received or paid in respect of foreign currency option contracts (FCOCs) entered into and any consideration paid in respect of an FCOC acquired by certain persons.
Under section 24I, exchange differences calculated for a year of assessment are generally included in or deducted from income whether realized or not and whether of a capital or revenue nature. The legislation was drafted in this manner in line with the view that gains and losses on foreign exchange transactions largely represent finance charges and as a result, must be brought to account on a revenue basis for tax purposes at the end of a year of assessment even if not realized.
There are limited circumstances in which the inclusion of a foreign exchange gain or loss calculated in respect of an exchange item in a particular year of assessment is deferred and recognized in a later year of assessment. Subject to certain conditions/restrictions, this may include deferral of exchange difference on debt between companies forming part of the same group of companies and between connected persons, as well as debt financing certain assets.
The note withdraws and replaces Practice Note 4 dated 8 March 1999 "Income Tax: The Treatment of Gains and Losses on Foreign Exchange Transactions in terms of section 24I of the Income Tax Act, 1962 (the Act)".