Section 24I requires that a gain or loss on a foreign exchange transaction be included in or deducted from the income of a taxpayer carrying on a trade within the Republic.

In essence, section 24I taxes all gains and losses, whether it is realised or not relating to any foreign exchange transactions.

Prior to 1 March 2017, a foreign exchange gain or loss arising on a foreign denominated loan granted by a South African taxpayer (who is not a money lender) to another person, would have had to be taken into account in determining the taxable income of the South African taxpayer.

However, where the loan becomes bad, a taxpayer was not allowed to claim a deduction of the foreign exchange difference in terms of section 11(a) if the loan was utilised for capital purposes. The taxpayer would also not be able to claim a deduction under section 11(i) as this section requires that the amount that became bad had to be included in the current or prior year’s taxable income.

Therefore the taxpayer was in a position where he might have been taxed on a foreign currency gain on the annual restatement of the foreign loan, but not allowed to claim a deduction if the foreign loan ever became bad.

SARS has realised the unfairness of this application of the law, and amended section 24I. They have included section 24I(4) to correct this position.

Section 24I(4) states the following:

”Subject to section 11, in determining the taxable income of any person contemplated in subsection (2) in respect of a debt owing to that person as referred to in paragraph (b) of the definition of exchange item, to the extent that it has become bad –

  1. The amount of any foreign exchange gain, relating to that debt, that is or was included in the income of that person in the current or any previous year of assessment must be deducted from the income of that person; and

  2. The amount of any foreign exchange loss, relating to that debt, that is or was deducted from the income of that person in the current or any previous year of assessment must be included in the income of that person.”

This addition to section 24I effectively allows a taxpayer to now either deduct or add an exchange gain or loss that relates to a foreign loan that became a bad debt.

This section came into effect on 1 January 2017 and is applicable in respect of years of assessment ending after that date.

Should you have any foreign transactions or foreign assets & liabilities, we advise that you consult your tax practitioner as section 24I is a complex section of the act and can have a significant impact on a South African taxpayer that trades internationally.

Engela Crocker

Associate | Tax, Johannesburg

Also read: The importance of knowing your provisional tax status