Farming

Question 1

What does the term farming operations includes?

Answer 1

Only those activities carried on by a farmer on his own land and from which he derives income.

Question 2

Does the farmer has to be owner of the land he farms on?

Answer 2

No, the farmer need not to be the owner of the land but he must have the right to use the land and enjoy its yield.

Question 3

How to you determine the taxable income derived from farming?

Answer 3

The taxable income of any person carrying on pastoral, agricultural or other farming operations shall in so far as it is derived from such operations be determined in accordance with the provisions of the Act but subject to the provisions of First Schedule.

Question 4

List some of the case laws and its principles in farming.

Answer 4

1. ITC 1319
   
   • genuine intention to farm
   • ultimate profit
2. H v COT
   
   • hobby is not farming
3. ITC 1548
   
   • farming operations include only activities connected with what a farmer derives from his land
   • he needs not be the owner but must enjoy the right to property and its yield

Question 5

What is livestock?

Answer 5

It refers to the animals farmer farms with

Question 6

What is produce?

Answer 6

Is what the farmer grows or what is produced by the livestock (milk, wool, etc)

Question 7

What is included in livestock?

Answer 7

All animals used by a farmer in his farming operations are included in livestock.

Question 8

What is not included in produce?

Answer 8

The court have held that the term produce does not include farming products which have not been harvested.

Question 9

What does the paragraph 2 of First Schedule provide in terms of opening and closing stock for farmers?

Answer 9

A farmer must include the opening and closing stock of livestock and produce in his income tax return

Question 10

What does paragraph 3 of First Schedule provide for treatment if opening and closing stock?

Answer 10

Closing stock is added to income

Opening stock is deducted from income

Question 11

What does paragraph 4 of First Schedule provide for what should be included in the value of opening stock?

Answer 11

The value of stock at the beginning of the year us equal to the sum of:

- value of closing stock at the end of previous tax year
- market value of livestock or produce acquired during the year otherwise than by purchase natural increase or in the ordinary course of farming operation (includes donation)
- the market value of livestock or produce held otherwise than for purpose of farming activities with such farmer commences to hold for farming purpose during the year.

Question 12

What does paragraph 5 of First Schedule provide for value of closing stock?

Answer 12

All closing stock of livestock is valued at standard values.

Standard values are lower than market value and they are fixed by regulations in the Act.

Question 13

What does paragraph 6 of First Schedule provide where there is no standard value for livestock?

Answer 13

Where livestock does not have a standard value, a farmer may elect his own standard values but these may not differ more than 20% from standard value set by regulations

Question 14

What does paragraph 7 of First Schedule provide about the treatment of standard value?

Answer 14

Once a standard value is chosen it must be used consistently and may not varied

Question 15

What is the limit on expenditures in respect of acquisition of livestock?

Answer 15

Expenditure in respect of the acquisition of livestock is limited to the farmer’s income for the year.

Question 16

What does paragraph 8 of First Schedule provide on the effect if using standard value for closing stock?

Answer 16

Because of the effect of using standard value for closing stock of livestock, a farmer could create a large farming loss in a tax year by making large purchases of livestock. The purchases would be deducted at cost under s11(a) and closing stock would then be reflected at standard value.
Any amount that is disallowed shall be carried forward and be deemed to be expenditure incurred by the farmer in respect of acquisition of livestock during the year.

Question 17

To calculate the amount that is allowed as a deduction for livestock use the following tests:

Answer 17

Test 1: limit the amount that is allowed as a deduction to
Farming income before closing stock
Add: closing stock at standard value
Less: opening stock at standard value 
= expenditure deductible
If there is access that is not deductible from test 1, perform test 2.
Test 2: 
Take excess after test 1
Plus: opening stock at standard value
Less: closing stock at market value
= further deduction

Question 18

What does paragraph 9 of First Schedule provide in terms of what is included in produce?

Answer 18

Produce includes any product of farming operations once it has been picked, harvested or reaped.
In terms of paragraph 4, produce acquired by farmer otherwise than by purchase (donation) shall be included in opening stock at market value, it is submitted that such produce will also be included in the closing stock at market value if it is still on hand at the end of the year.

Question 19

What is considered as domestic consumption?

Answer 19

If livestock or produce has been applied by a farmer for domestic or private use or consumption there shall be included in his income for the year of assessment an amount equal to the cost price to the farmer of such livestock or produce, if cost price is not available use market value.

Question 20

What is considered as other forms of non-trade disposal?

Answer 20

If a farmer has donated livestock or produce, disposed of other than in the ordinary course of farming operations for consideration less than market value, distributed as an in specie dividend, or has applied livestock or produce in any other manner other than disposal thereof in the ordinary course of farming activities, the market value of such stock shall be included in his income.(staff ration)

Question 21

Where livestock or produce has been disposed of other than in the course of farming operations for a consideration less than market value,what needs to be included in income?

Answer 21

Only the difference between market value and consideration received.

Question 22

What value is used in the determination of closing stock of produce?

Answer 22

Used only harvested and lower of average cost or market value.

Question 23

What are some allowable deductions for a farmer?

Answer 23

1. Purchase of livestock
2. Hiring of farming land
3. Animal feeds
4. Fertilizer
5. Wages and salaries
6. Employee rations
7. Seeds, plants,trees
8. Expenses for clearing land (not Pre-trade)
9. Veterinary expenses
10. Rates and taxes
11. Packing materials
12. Interest related to farming operations

Question 24

What of a capital expenditure for a farmer?

Answer 24

A farmer’s capital expenditure is deducted either in full (subjected to certain limits) under the provisions of paragraph 12 of First Schedule or as a special depreciation allowance under s12B or as wear and tear allowance under s11(e)

Question 25

What does paragraph 12 of First Schedule provide for allowable deductions?

Answer 25

The following expenditure is allowed as a deduction: 1. The eradication of noxious plants and alien invasive vegetation (full) 2. The prevention of soil erosion (full) 3. Dipping tanks (limited to farming income, cannot create loss) 4. Dams, irrigation schemes, boreholes and pumping plants (limited to farming income, cannot create loss) 5. Fences (limited to farming income, cannot create loss) 6. The erection of, or extensions, additions, or improvement (not repair) to, buildings used in connection with farming operations other than those used for domestic purposes. (limited to farming income, cannot create loss) 7. The planting of trees, shrubs or perennial plants for the production of grapes or other fruits, nuts, tea, coffee, hops, sugar, vegetable oils or fibers and the establishment of any area used for the planting of such trees, shrubs or plants. (limited to farming income, cannot create loss) 8. The building of roads and bridges used in connection with farming operations. (limited to farming income, cannot create loss) 9. The carrying of electric power from the main transmission lines to the farm apparatus. (limited to farming income, cannot create loss) The excess from 3 - 9 must carried forward to the following year (unredeemed capital development expenditure)

Question 26

What did paragraph 12(3B) state on the recoupment of movable asset?

Answer 26

The recoupment on movable assets in the year must first be set off against the amount brought forward from the previous year which would have been deducted in terms of paragraph 12, and the difference must then either be added or subtract form the farmer's income.

Question 27

In terms of unredeemed capital expenditure, what happens to it when the asset is disposed off?

Answer 27

These unredeemed expenditure may be added to the base cost.

Question 28

What does s12B special depreciation allowances provide?

Answer 28

At machinery, implements, utensils or articles (other than livestock) acquired by a farmer (new or second hand) and brought into use by him for the first time, are subject to a depreciation allowance on the cash cost of the asset (owned and used in farming operation) 50%, 30%, 20% No apportionment!

Question 29

If assets do not fall into paragraph 12 or s12B then it is a movable asset, what allowance does it qualify?

Answer 29

S11(e) wear and tear allowance

Question 30

Does capital development expenditure deducted in terms of paragraph 12 subject to general recoupment provision?

Answer 30

No, only movable assets are subject to general recoupment. Scrapping and wear and tear allowances are not allowed. Infrastructure establishment is deducted in full in first year.

Question 31

How do you calculate the CGT for farming operations?

Answer 31

1. Recoupment = selling price - tax value Tax value = cost - allowances 2. Proceed = selling price - recoupment 3. Base cost = cost - allowance (including scrapping allowance) 4. Capital gain = proceed - base cost 5. Use applicable inclusion rate NB. Do CGT for farmer as part of farming taxable income Do CGT for other income as part of other income calculation.

Question 32

Farming income is subject to provision of First Schedule of the Income Tax Act. Because of a farmer's income can fluctuate form year to year, he may elect to be taxed in accordance with a rating formula. What is the formula?

Answer 32

``` Y= [A/(B+D-C)] x B B= total taxable income (farming + other) C= the amount by which his actual farming taxable income exceed average farming taxable income (first year farmer use 2/3 of actual taxable farming income) D= 0 A= normal tax on (taxable income - amount of actual exceeds average taxable income) ```

Question 33

What is the treatment of assessed loss for farmers?

Answer 33

Being in assessed loss from previous year after: Capital development expenditure Rating formula

Question 34

In terms of CGT, what is the primary residence exclusion for farmers?

Answer 34

``` 2 heaters of the property CGT calculation: Proceed Less base cost = capital gain Less exclusion for farmer Less annual exclusion (R20 000) Include inclusion rate in taxable income ```

Question 35

What is the farming framework?

Answer 35

``` Income: Sales: produce + Sales: livestock + Private consumption @ cost + donations of produce or livestock @ MV + employees rations @ MV + recoupment + closing stock: Produce @ lower of cost or MV Livestock @ standard value = total farming income Less: farming expenses Expenses - Opening stock: Produce @ MV Livestock @ standard value - Inheritance / donations / dividends in specie @ MV - purchases: Test 1: deduction limited to Total farming income (excluding closing stock) + closing stock @ standard value - opening stock @ standard value = deduction Carry excess to test 2: additional deduction Excess after test 1 + opening stock @ standard value - closing stock @ MV = further deduction General farming expenses - feed purchased - seeds and fertilizer - veterinary expenses - wages - salaries - employees rations @ MV Capital allowances: - wear and tear allowances s11(e) - special allowances s12B: 50, 30, 20 = net farming income + capital gain from farming assets - capital development expenses Soil erosion (full) Noxious plants (full) - capital development expenses (limited to income) Balance brought forward from previous year Less: recoupment in current year Current year expenditures Fences Irrigation scheme Roads Dipping tanks Trees Electric power Carry excess to next year = total taxable farming income + Other income Salaries Pension Lump sum Interest Rent - deductions Pension contribution Retirement annuity fund contribution + capital gain on non-farming assets - deduction on medical aid = total taxable income ```