Capital gains tax relief on certain foreign currency gains

The Draft Taxation Laws Amendment Bill, 2011 (Bill), proposes to delete Part XIII from the Eighth Schedule to the Income Tax Act (Act).

Part XIII deals with the taxation of realised gains and losses in respect of foreign currency assets and liabilities in monetary form, such as foreign currency or debts in foreign currency. It only applies to persons to whom section 24I of the Act does not apply. Section 24I applies to companies, trusts carrying on a trade, natural persons who hold foreign currency or debts in foreign currency as trading stock, and natural persons or trusts in respect of forward contracts or options in foreign currency. Accordingly, Part XIII usually applies to natural persons, and trusts that do not carry on a trade.

Essentially, Part XIII taxes these persons and trusts by means of capital gains tax and not under the provisions of the main Act. Part XIII also makes provision for a method for determining the capital gain or loss in respect these monetary foreign currency assets and liabilities, known as the “pooling method”. The method entails that a taxpayer should pool his monetary foreign currency assets held in a particular foreign currency and determine a base cost in rands. The base cost of any particular asset in that pool will be a fraction of the total base cost. When there is a disposal, the pool must necessarily be reduced again.

The deletion of Part XIII means that most natural persons will no longer be subject to capital gains tax in respect of any foreign currency gains and losses made. In fact, they will not be subject to any form of tax in this regard. The reason provided by National Treasury is that monitoring currency movements for purposes of the pooling method is too complicated and cost- and resource intensive from a revenue point of view.

Trusts, other than special trusts, will unfortunately not benefit from the deletion of Part XIII. Rather, the Bill proposes that all trusts be brought into the ambit of section 24I of the Act, and they will be fully taxed on unrealized gains or losses.

Non-monetary foreign currency assets will continue to be taxed under paragraph 43 of the Eighth Schedule, which simply provides that a gain or loss is to be calculated in the relevant foreign currency, and once calculated, converted to Rands.

However, in the case of foreign equity instruments, the base cost must be translated into Rands when incurred, and the proceeds translated into Rands when realised, to arrive at a capital gain on the difference.