Frank Sebatana | Senior Legal Tax Consultant, PKF Durban

Companies, whether they carried on a trade or not, were entitled to deduct any net foreign exchange (“forex”) loss from taxable income whilst any net forex gain was added to taxable income during a year of assessment.

For years of assessment commencing on or after 01 January 2025, section 24I of the Income Tax Act (“ITA”), has been amended such that non-trading companies can only deduct the net forex loss against the net forex gain (where the net forex loss exceeds the net forex gain, the excess is carried forward to the next tax year). However, the net forex gain is still included in the taxable income in that tax year.

Simply speaking this amendment, now prohibits the tax deduction of the net forex loss, for non-trading companies, to be set off against other types of income or taxable capital gains in the year.

The amendment of section 24I of the ITA, presents a circumstantial challenge for companies due to the lack of clear prerequisite requirements for what constitutes the carrying on of a trade. According to section 1(1) of the ITA, the term “trade” is defined to:

“includes every profession, trade, business, employment, calling, occupation or venture including the letting of any property and the use of or the grant of permission to use any patent as defined in the Patents Act or any design as defined in the Designs Act or any trade mark as defined in the Trade Marks Act or any copyright as defined in the Copyright Act or any other property which is of a similar nature;”

Therefore, “trade” implies an active occupation, as opposed to the passive earning of investment income generally by way of dividends and/or interest. Furthermore, the prerequisite of section 11(a) of the ITA for general deductions allowed in determination of taxable income requires that a trade be “carried on..” which means that there should be active steps which was stated in the case of ITC 1476, where the court held that, “the carrying on of trade involves an active step”.

Non-trading companies who want to utilise the net forex loss deduction must consider the amendment of this section and the different treatment for trading and non-trading companies. In most cases the nature of the taxpayer’s business may indicate whether it will be deemed to be carrying on a trade as seen in the case of ITC 1275, where the court held that, “watching over of investments does not constitute a trade”.

Practical Scenario

Some “investment holding companies” obtain foreign loan funding which may give rise to a forex loss or gain but there is a risk as highlighted in ITC 1275, which states that such activities do not constitute carrying on a trade.

“Treasury companies” which hold foreign loans are also at risk of not carrying on trade, considering the challenges presented by the difficulties arising from determining whether a money lender’s activities constitute the carrying on of a trade. According to Sentra-Oes Kooperatief Bpk v KBI, a money lending business may constitute a trade.

Conclusion

Based on the above, it is strongly recommended that companies which may be affected by this change in the tax rules seek professional advice for a proper determination whether it is carrying on a trade and ensure that section 24I (3) of the ITA is correctly applied. This is a circumstantial determination that should be solicited by way of an opinion from an independent registered tax practitioner in terms of section 223(3)(b) of the Tax Administration Act.

Should you require assistance, please contact your nearest PKF Office