FAQ - October 02
02 October 2013
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Average exchange rate in terms of section 25D
The taxpayer is a company registered in the BVI. They are
resident in SA for tax purposes as it's place of effective management is in SA.
The company does not have a permanent establishment outside the Republic. The
company trades, with Reserve Bank approval, in US dollars. For SA tax purposes
the company determines their taxable income by translating this to the currency
of the Republic at the average exchange rate for the particular year of
SARS have acknowledged in certain circumstances that it may
be impractical for a taxpayer to use the spot rate where a series of
transactions have taken place in a foreign currency. It appears that SARS have
not considered the situation of a taxpayer as set out above. The legislation
states that translation must be at the spot rate - this is impractical for the
taxpayer - should a specific ruling be requested from SARS?
Does a company incorporated in the BVI, resident in SA for
tax purposes and trading in US dollars need to determine taxable income at the
spot or average rate?
Can the taxpayer continue to use the average exchange rate or
are they required to use the spot rate as set out in section 25D(1)?
Section 25D of the Income Tax Act contains the general currency
conversion provisions which will apply in all cases unless a specific section
contains its own currency conversion rules.
Persons other than natural persons and trusts must convert all
income and expenditure and losses (in a foreign currency) to Rand by using the spot
rate on the date that the
income is received or accrued or the expenditure or loss is incurred.
As per section 25D(3), read together with section 25D(1), a
natural person or a trust (other than a trading trust) may elect to use the
spot rate OR the average
exchange rate to convert foreign income to SA rand. If the average exchange
rate is elected it must be applied to all income or expenditure during the
relevant year of assessment.
However, specific provisions apply if the taxpayer qualifies as
a headquarter company in terms of section 9(I)(1).
25D(4), which comes into operation for years of assessment commencing on or
after 1 January 2011, states that the conversion of the income of a headquarter
company is a two-stage process:
- Convert foreign income and
expenses to functional currency of headquarter company (if the functional
currency is not rand).
- Convert the functional currency
amount to rand.
- Apply the average exchange
rate in both cases.
The company must therefore convert all income and
expenditure and losses (in a foreign currency) to Rand by using the spot rate on the date that the income is
received or accrued or the expenditure or loss is incurred, unless the company
qualifies as a headquarter company as defined. You may apply for a specific
ruling from SARS in this regard, with reference to your clients’ specific
2. VDP and submittal of returns
My client left RSA in 2000 and has been living in
Switzerland. When he left RSA his tax affairs were up to date. In 2004 he
started renting out a property but was making no profit as the interest on the
bond and other expenses created a loss. For the last 4 years the property has
been making a profit as the bond has been paid off. My client would like to
submit all the tax returns so that the assessed loss on the property can be
carried forward and used against the profits that are now being generated. Is
How far back can you submit tax returns and how does VDP work
for tax returns that need to be submitted from 2001?
Section 171 of the Tax
Administration Act states as follows:
recovery of a tax debt may not be initiated after the
expiration of 15 years from the date of the assessment of tax, or a decision
referred to in section 104(2) giving rise to a tax liability,
From the information you have provided your clients’
outstanding returns fall within the 15 year period and has to be submitted.
Kindly find attached SARS VDP
guide for your information. As per the guide:
REQUIREMENTS FOR A VALID
To ensure that a VDP application
is valid, a disclosure must:
- be voluntary
- involve a default which has
not previously been disclosed to SARS by the applicant or representative of the
- be full and complete in all
- involve the potential
imposition of an understatement penalty in respect of the default
- not result in a refund due
- be made in the prescribed
form and manner
Outstanding tax returns that
relate to a VDP application can be submitted to SARS through normal channels at
any time before the VDP application is processed. If the return is
assessed by SARS before the VDP application is processed, interest and
penalties that are eligible for VDP relief will be waived when the VDP
application is processed and a VDP agreement concluded. The SARS debt
collection division is aware of this and will refrain from instituting
collection steps on eligible interest and penalties until the VDP application
3. Capital Gains Tax
If a farmer has an accumulated loss for 2010,2011 and 2012 of a
total of lets say R 1,2 million and he sells his farm, with a capital gain which
must be included at 25% if is say for instance R 1 million (inclusion) can this
gain be off set against the assessed losses of the previous years for taxable
According to me if you look at the taxable income model, the loss
will be included with the capital gain, and the difference will be taxed, if
there is a taxable amount that is left after the loss has been taken into
In order to determine the ‘taxable income’ from ‘trade’ the
taxpayer may set off:
- A balance of assessed loss brought forward from
the previous year of assessment; and
- Any assessed loss incurred in the current year in carrying
on any other trade.
Taxpayers other than companies and close corporations (such as
individuals and trusts) may set-off an assessed loss against non-trade income,
such as interest. Companies and CC’s may not.
An assessed capital loss
may not be deducted from taxable income. Any assessed capital loss is carried
forward to the next year of assessment.
Section 26A of the Act provides
that a taxable capital gain must be included in taxable income, i.e. utilised
against tax losses.
4. SBC Formula
I would like to find out how one would apply the SBC formula to an entity which was not trading for the full year. The entity qualified as an SBC for the 2011 and 2012 years of assessments. In 2013 their revenue amounted to R 18 million and they paid tax at 28%. If they were actively trading for the whole of the 2014 year of assessment they would more than likely qualify as an SBC again, because the limit was increased to R 20 million. The entity liquidated at the end of June 2013 and therefore only actively trading for 4 months of the 2014 year of assessment. Therefore I would like to know if we could apply the SBC formula for the 4 months in 2014?
In terms of s 12E(4)(a)(i) of the income Tax Act, must the
must the amount be reduced to an amount which bears to that amount , the same
ratio as the number of months during which that company carried on that trader
bears to 12 months.
5. Restraint of Trade
A company received a restraint of trade
payment from a valid contract. Is the restraint of trade receipts by a
company subject to capital gains tax (assuming it does not fall with the ambit
of gross income including para cA).
In the event that a restraints payment
does not fall within the ambit of gross income, para cA will it be
considered capital of nature, and will the transaction result in a capital gain
in the hands of the recipient.