Very comprehensive rules relating to the tax treatment of gains and losses on fo

reign exchange transactions have been introduced into our tax law. Although extr
emely complex there is now far greater certainty as to the deductibility and tax
ability of both realised and unrealised gains and losses. In very brief outline
the position is as follows:

· As gains and losses effectively represent finance charges, they are all
to be taxable or deductible whether of a capital nature or not and whether real
ised or not. This applies to all years of assessment ending on or after 1 Januar
y 1994.

· As a transition only, exchange differences arising out of loans, advanc

es or debts due to any taxpayer (as opposed to amounts due by taxpayers) and whi
ch existed on the last day of the 1993 year of assessment and which are of a cap
ital nature, will not be taxable or deductible (as in the past). Also unrealised
exchange differences at that date (other than amounts of a capital nature due t
o taxpayers - see above) will be brought to account for tax purposes to the exte
nt of 50% in the 1994 tax year and 50% in the 1995 tax year (except if all reali
sed in the 1994 tax year in which case there will be no spreading to 1995).

· Exchange differences (i.e. gains or losses on foreign exchange transact

ions) will obviously only be taxable/deductible where the exchange difference ar
ises from a transaction entered into by the taxpayer or a person connected to hi
m in the course of the carrying on of a trade by him in the Republic. If assets
are acquired but not yet brought into use, the exchange difference will only be
accounted for when the asset is brought into use for trade purposes.

· The exchange items to which the new rules apply are those in respect of
-

Foreign currency amounts owing by or to a taxpayer in respect of a loan, advance

or debt.

Foreign currency amounts owing by or to a taxpayer in respect of a forward excha

nge contract.

Foreign currency amounts arising from the holding or writing of foreign currency
option contracts.

· All foreign exchange transactions must for recording purposes be conver

ted to rands at the exchange rate ruling on the "transaction date" i.e. the day
when the cash flowed (in the case of loans or advances) or the day when the debt
, forward exchange contract or foreign currency option was incurred/ acquired/en
tered into.

All variations in exchange rates after that date give rise to exchange differenc
es.

· When the exchange item has been realised, the gain or loss is determine
d as the difference in Rands arising from the fluctuation in the exchange rate b
etween "the transaction date" and the date of realisation. If a financial year e
nd (or more than one) intervenes, the exchange item has to be translated (i.e. v
alued in Rands) at each year end date (until realised) based on the "spot" excha
nge rate at that date. The differences must be brought to account each year as t
axable gains or deductible losses.

· The cost of imported trading stock or fixed assets or the selling price
of goods or services in foreign currency must be determined by translating the
foreign currency amount at the exchange rate on the abovementioned transaction d
ate. Subsequent variations in the exchange rate prior to settlement do not affec
t the cost of the stock or fixed assets and the cost must not be adjusted. Excha
nge differences must be treated as exchange gains or losses.

· If the transaction is covered by a forward exchange contract, such cont

ract should be treated as a separate exchange item and recorded separately from
the underlying transaction. In practice however, the underlying transaction ofte
n will simply be recorded at the exchange rate applicable to the forward exchang
e contract and the premium will be written off as part of the expense or treated
as part of the income. This latter treatment therefore is specifically condoned
where a related or matching forward exchange contract has been entered into to
hedge the loan, advance or debt and such forward rate has been used for accounti
ng purposes.