The Deferral of Unrealised Foreign Exchange Gains and Losses Rules, and the Applicability to Parties Other Than the Lender or Borrower

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v16_n1_a3
• Author: Michael Rudnicki Rudnicki
• Pages: 7-13
• Date: 01 March 2025
• Published date: 01 March 2025
• Published By: Siber Ink

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© Juta and Company (Pty) Ltd

The Deferral of Unrealised Foreign

Exchange Gains and Losses Rules,

and the Applicability to Parties

Other Than the Lender or Borrower

MICHAEL RUDNICKI

ABSTRACT

This article considers the tax rules in relation to the deferral of unrealised

foreign exchange gains and losses (referred to in tax terms as ‘exchange

differences’) in respect of foreign loans between related parties and whether

the deferral rules can be extended to include parties to the loan agreement

other than the debtor and creditor. The rules applicable to foreign exchange

gains and losses are dealt with in section 24I of the Income Tax Act, 1962

(‘the Act’). This provision subjects realised gains or losses to income tax, but

defers the tax treatment of exchange differences on certain loans and debts to

subsequent years in which the underlying asset is brought into use.

Unrealised foreign exchange gains and losses (referred to as ‘exchange

differences’) in respect of foreign currency loans (loans in foreign currency

constitute ‘exchange items’) between related parties are deferred until the

settlement or realised date of the loan, meaning that these gains and losses

are not ref‌l ected in taxable income while the loan is not settled.

The deferral rules applicable to a ‘group of companies’ and ‘connected

persons’ are found in section 24I(10A)(a) of the Act. The rules are comprehen-

sive, but the particular issue for consideration in this article is the meaning of

the words in the following extract:

‘… [N]o exchange difference arising during any year of assessment in respect of

an exchange item … shall be included in or deducted from the income of a person

in terms of this section—

(i) if, at the end of that year of assessment—

(aa) that person and the other party to the contractual provisions of that

exchange item—

(A) form part of the same group of companies; or

(B) are connected persons in relation to each other...’ (my emphasis).

The key question considered in this article is whether a guarantor to a loan

agreement or any other party for that matter, being a party to a loan agree-

ment, brings the agreement within the ambit of section 24I(10A)(a)(i)(aa),

where such party or parties are either a ‘connected person’ in relation to the

borrower or part of the same ‘group of companies. The hypothesis here is

that these entities are party to the contractual provisions of the exchange

item, namely the loan. The crisp issue is whether ‘the other party’ referred to

in section 24I(10A)(a)(i)(aa) is intended to apply narrowly to a typical lender-

borrower relationship or whether it should apply broadly to any party to the

contractual provisions of an exchange item.

2025 16(1) BTCLQ 7

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