Foreign exchange loss on loan - whether allowable
15/01/1997
Query
Taxpayer claiming relief for foreign exchange loss on five year loan obtained to purchase plant for use in the taxpayer's trade. The exchange losses arose in respect of the balance outstanding on the loan and were claimed as a deduction in calaulating the taxpayer's trading profit. The question at issue was whether the exchange losses were on capital account. This in turn depended on whether borrowings are a means of temporary and fluctuating accommodation. Effect of decision in Mutual Enterprises Ltd case.
Decision
The Supreme Court decision in Mutual Enterprises held that the question of whether borrrowings are a means of temporary and fluctuating accommodation is a question of fact rather than law. Even though the Circuit Court judge in the particular circumstances of the case held that the borrowings were on revenue account, the dicta in the High Court indicate that the High Court judge would have attached significance to the fact that money was borrowed with the intention of purchasing a capital asset. Revenue's view is that borrowings to purchase a capital asset for use in a trade is indicative that the borrowings are on fixed capital account and that any exchange loss incurred in relation to the borrowings should not be deducted in arriving at the taxable profits of the trade.
Income Tax
Section 61, Income Tax Act, 1967
Origin: RLS Division
File ref:IT972000