Peculiarities of the fair value taxation regime for financial instruments

Abstract

The enactment of s24JB represents a significant change in the taxation of financial instruments. The traditional approach of including amounts in gross income on the earlier of receipt or accrual is superseded by a fair value regime grounded in International Financial Reporting Standards. Initially, this approach appears logical, resulting in an alignment of the determination of taxable income and total comprehensive income for financial reporting purposes. A closer examination, however, reveals a number of tensions between the relevant International Financial Reporting Standards and s24JB. This confirms the position in the prior corporate governance and tax literature that seldom are new laws and regulations free from dysfunctional consequences.

Keywords:

• Fair Value Tax Regime
• Income Tax
• Financial Instruments
• International Financial Reporting Standards
• Section 24JB
• Unintended Consequences

Acknowledgements

Special thanks to Professor Robert Garnett for comments on an earlier draft of this paper. I must also extend my gratitude to my dear friend, Lelys Maddock, for her invaluable editorial services.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Local or foreign dividends received or accrued by a “covered person” are also excluded from the application of s24JB (2). The taxation of dividends is, however, beyond the scope of this research.

2. Section 24JB(2) also refers to the taxation of commodities carried at fair values less cost to sell. The tax and financial reporting requirements for commodity brokers is, however, outside the scope of this research.

3. As such, the exception does not apply to derivative instruments.

4. Although IFRS 9 is not currently effective (its effective date has been withdrawn by the IASB), some taxpayers have elected to adopt the accounting standard early.

5. The Conceptual Framework does not provide a basis for including changes in net asset values in OCI. Nevertheless, preparers would be able to apply the qualitative characteristics, particularly the concept of communicating the underlying economic reality, when deciding if a financial instrument is held “principally” for trade.

6. The same argument applies to the Companies Act (2008), which also refers to IFRS. The delegation of authority to the IASB to develop financial reporting standards for the purpose of South African Company Law is, however, beyond the scope of this research.