[FAQ] The applicable exchange rates when competing an ITR12

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[FAQ] The applicable exchange rates when competing an ITR12

• 18 March 2021
• Individuals Tax
• Piet Nel

This article is based on tax law for the year ending 28 February 2021.

Background

A taxpayer started working in Mozambique on the 1 April 2020. The salary and benefits he earns are paid in Mozambique Meticals. The company he works for deducts tax from his earnings also in Meticals and pays it over to the Mozambican Authorities.

He is regarded as a taxpayer in South Africa as his wife and kids still live here and he also owns fixed property here. The exchange rates available in Table A and Table B don't cater for rates regarding Meticals/ZAR currencies.

What rate would he use to do the conversions when completing his ITR12?

Answer

Income Tax Act

We accept that, with ‘regarded as a taxpayer in South Africa’, you mean that he is someone persons who is deemed to be exclusively a resident of the RSA for purposes of the application of any agreement entered into between the governments of the RSA and Mozambique for the avoidance of double taxation. There will then be a dual taxing right – see Article 14 of the treaty.

The general rule, see section 25D(1) of the Income Tax Act, is that any amount received by or accrued to … a person during any year of assessment in any currency other than the currency of the Republic must be translated to the currency of the Republic by applying the spot rate on the date on which that amount was so received or accrued ...

In terms of section 25D(3), a natural person … may elect that all amounts received by or accrued to … that person … in any currency other than the currency of the Republic, be translated to the currency of the Republic by applying the average exchange rate for the relevant year of assessment.

Remember that any foreign tax must however “be translated to the currency of the Republic on the last day of that year of assessment by applying the average exchange rate for that year of assessment.” See section 6quat(4).

Application of the principles

A taxpayer doesn’t have to use the SARS provided tables. These tables only provide the average exchange rates. As defined, see section 1(1) of the Income Tax Act, “average exchange rate” in relation to a year of assessment means the average determined by using the closing spot rates at the end of daily or monthly intervals during that year of assessment which must be consistently applied within that year of assessment.

The South African Reserve Bank (SARB) determines weighted average exchange rates, based on the foreign exchange transactions of commercial banks.

Note, taxpayers using average exchange rates which differ from those published by SARS must, however, keep record of all calculations for audit purposes.

Webinar Commentary

Refer to webinar commentary on the Exchange Control Changes – Estate Planning and the Dispersed Family 2021 here.

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