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.
The First Schedule deals with the computation of taxable income derived from pastoral, agricultural or other farming operations. This schedule applies regardless of whether the taxpayer derives an assessed loss or a taxable income from the farming operations.
Furthermore, The First Schedule applies to any person who derives a taxable income from above-mentioned farming operations. The person could be an individual, a deceased estate, an insolvent estate, a company, a close corporation or a trust.
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.
The taxable income that is derived from farming operations is combined with the taxable income from any other sources to arrive at the relevant taxpayer’s taxable income for the applicable year of assessment. If a loss is created, during the year of assessment, in the production of farming income, this specific loss should be carried over to the next financial year. The loss can only be utilised by income-generating activities that are in the production of farming income.
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. (E&OE)