Farming in South Africa is like second nature to most South Africans, but the tax implications on farming operations seem to raise some questions when determining a taxpayer’s taxable income. The taxation of farming operations is subject to a unique set of taxation rules. SARS requires that all income and expenses relating to farming operations be separately disclosed so that they can easily assess whether the specific tax rules have been adhered to.
The expression “farming operations”, is not defined in the Income Tax Act and should be interpreted according to its ordinary meaning, which according to Merriam-Webster dictionary is the science, art, or practice of cultivating the soil, producing crops, raising livestock and in varying degrees the preparation and marketing of the resulting products.
Section 26(1) of the Income Tax Act stipulates that the taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in so far as the income is derived from such operations, be determined in accordance with the Act but subject to the First Schedule.
On the other hand, not all activities in farming constitute farming operations. Thus, in order to fall within the First Schedule, a farming operation needs to be the trade of the taxpayer and there must be an overall profit-making intention. If the activities carried out are only for the benefit of the individual, without the prospect of making a profit, the individual will not be carrying on farming operations.
If a loss from farming activities is created in consecutive tax years, there is a risk that the loss will be ring-fenced in terms of Section 20A of the Income Tax Act, meaning it may not be set-off against other taxable income of the taxpayer and is carried forward to the next financial year to be utilised against future farming profits. For the purposes of this newsletter we will not go into any further details regarding the complexities of Section 20A.
In conclusion, it is essential to determine the nature of farming activities and whether these activities are farming operations. If so, the First Schedule deals with the calculation of the taxable income.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)