Income Tax Act: Keep an eye on the definition of 'exchange item’

22 April 2024 ,  Tanya Strauss 116
In the recent 2024 National Budget speech, Finance Minister Enoch Godongwana made mention of a possible change to the definition of an “exchange item” for determining taxable exchange gains given that certain financial arrangements are eroding the tax base due to a mismatch in exchange losses and gains when it comes to taxable income.

Section 24I of the current Income Tax Act subjects realised and unrealised gains or losses on “exchange items” to normal income tax. As the act currently stands, an “exchange item” is confined to one of the following:

  • a unit of foreign currency
  • a debt in a foreign currency (this includes loans and advances)
  • a foreign currency forward exchange contract 
  • a foreign currency option contract
This implies all other financial assets such as ordinary or preference shares are excluded from the Section 24I definition of an exchange item meaning that any unrealised currency gains on these items are currently not taxable in South Africa. 

The Finance Minister posited that certain financial arrangements are eroding the tax base due to a mismatch, where some elements of the arrangement yield an exchange loss deduction for tax purposes, whereas exchange gains on other assets in the arrangement are not included in taxable income. This discrepancy according to the Minister appears to be particularly evident in certain preference share financial arrangements. Accordingly, Government proposes to address these tax leakages by extending the definition of an “exchange item” to include shares that are disclosed as financial assets for purposes of IFRS financial reporting.

This may impact on existing financial arrangements and taxpayers would be advised to keep a close eye on developments in this regard. PH Tax & Accounting will also monitor developments to ensure there are no unintended consequences for clients holding financial assets denominated in currencies other than South African Rand.

For queries or assistance with your tax and accounting requirements don’t hesitate to make contact with our Tax & Accounting Team.

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