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Thread: Foreign Exchange calculation for Foreign Income

  1. #1
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    Question Foreign Exchange calculation for Foreign Income

    Hello there,

    I'm not sure if I'm doing this correctly. There are two ways for calculating foreign income for tax returns. Either Table A or B. I have bank in the US because some of the clients are allowed to pay into the US bank, not South African bank. I also use this to park the fund until it is right time to transfer the fund. The invoices I sent to the foreign clients are all in foreign currency.

    Here is the publication for Average Exchange Rates (in terms of the Income Tax Act, 1962). I put the right amount in ZAR (after exchange) when the foreign amount is paid directly into South African banking account. I use Table A to calculate the income received on 22 June 2011 but I have to use the exchange rate ending February 2012 (R 7.4402) which is higher than the actual exchange rate in June 2011. It is not fair since it will push the annual turnover higher (hence higher income tax). I already spent the amount I received in foreign currency way before the tax year ended (29 February 2012).

    "The use of these average exchange rates is not compulsory. Stakeholders using average exchange rates which differ from
    those published by SARS must, however, keep record of all calculations for audit purposes."
    Since this is not compulsory then I'm willing to use monthly averaged exchange rate for June 2011 instead of averaged annual exchange rate ended on 29 February 2012.

    Am I correct?

    Thanks!

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    Are you incorporated?

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    No business entity. Just individual (freelancer) trading as "business name" and I do have several freelancers to help with getting several jobs done. This is to keep the tax matters simple.

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    Are you not able to calculate actual realised gains / losses? That would seem to be somewhat simpler.

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    I still need to put in total Turnover/Sales before I can deduct all valid expenses. I'm not entirely sure what you meant here. Maybe you can give me an example.

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    Oh, do you mean when the exchange rate for the date of actual transfer (to South Africa) occurred to calculate the actual gains/losses on per payment basis? Or should I rather focus on the date of payment received?

  7. #7
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    What I mean is that although you invoice in $,
    1. you should account for sales in ZAR at the forex rate on that day.
    2. when paid by the customer into the foreign bank account, you account for it in ZAR at the rate on that date.
    3. the difference between the two is a realised gain/loss

    Then there is the difference that arises simply as a result of the rate change applicable to the money sitting in the foreign account. That is unrealised (not taxable / deductable) until you transfer to a local account, then you realise a gain or loss on that transaction.

    All reference to rates means the spot rate. You can download daily rates in an excel file from the Reserve Bank.

  8. Thanks given for this post:

    anakin (30-Jan-13)

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    Thanks so much! I understand it better now and I'm not sure if I understand this:

    Then there is the difference that arises simply as a result of the rate change applicable to the money sitting in the foreign account. That is unrealised (not taxable / deductable) until you transfer to a local account, then you realise a gain or loss on that transaction.
    Here is the example of what I'm trying to understand:
    The invoice in $ 50,000 was sent to client on 17 April 2010. Forex rate: USD 1 = ZAR 8.50*
    The client made first payment of $ 30,000 into the foreign bank account on 31 April 2010. Forex rate: USD 1 = ZAR 8.30*
    Then $ 30,000 was transferred (by myself) to local bank account on 7 May 2010. Actual amount received: R 252,000 (ZAR 8.40*)

    The client made second and final payment of $ 20,000 on 16 November 2010. Forex rate: USD 1 = ZAR 8.40*
    Then $ 10,000 was transferred to local bank account (by myself) on 24 November 2010. Actual amount received: R 87,000 (ZAR 8.70*)
    The amount $ 10,000 was still in the foreign bank account at the end of tax year 2011 (unrealised?).

    *not actual amount/Forex spot rate for example purposes

    Calculations:
    Invoice on 17 April 2010: $ 50,000 = ZAR 425,000
    First payment ($30,000) made into foreign bank account on 31 April 2010 = ZAR 249,000
    Actual amount received (for $ 30,000) in local bank account on 7 May 2010 = ZAR 252,000

    Second an final payment ($20,000) made into foreign bank account on 16 November 2010 = ZAR 168,000
    Actual amount received in local bank account ($10,000) on 24 November 2010 = ZAR 87,000
    $10,000 still sitting in the foreign bank account.

    For Tax Returns:
    Turnover:
    ZAR 425,000 (as per invoice and spot Forex rate on that day)
    Realised/Unrealised Gain/Loss:
    First payment:
    255,000 (Invoice 17 April 2010: ZAR 8.50*) - 252,000 (actual amount received for $ 30,000 in local bank account: ZAR 8.40*) = 3,000 realised loss

    Second payment:
    85,000 (Invoice 17 April 2010: ZAR 8.50*) - 87,000 (actual amount received for $10,000 in local bank account: ZAR 8.70*) = 2,000 realised gain
    85,000 (Invoice 17 April 2010: ZAR 8.50*) - 84,000 (received on 16 November 2010 and it is still sitting in the foreign account: ZAR 8,40*) = 1,000 unrealised loss

    Should the unrealised loss be carried over to the next tax year, but I don't plan to transfer the remainder ($10,000) into local banking account?

    Thanks!

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    Simply put, in the balance sheet section of your tax return you are required to state Debtors and Bank in ZAR, at the spot rate at end February. Now even if there was no actual movement from the end of the previous tax year, the balances would be different due to the exchange rate. That difference is unrealised gain/loss until the (a) debtors pay and (b) you transfer to your local account, at which point it becomes a realised gain.

  11. Thanks given for this post:

    anakin (31-Jan-13)

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