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FAQ - October 02

Wednesday, 02 October 2013   (0 Comments)
Posted by: Author: SAIT Technical
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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 assessment.

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).

 Section 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 circumstances.

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 this possible?

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:

Proceedings for 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, becomes final.

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:


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 person
  • be full and complete in all material respects
  • involve the potential imposition of an understatement penalty in respect of the default
  • not result in a refund due by SARS
  • 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 is finalised. 

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 income?

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 account. 


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.



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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