To be, or not to be—A farmer
30 September 2010
Posted by: Author: Dirk Kotze
To be, or not to be—A farmer
The favourable tax treatment is examined
It appears that like in the times of King Richard II in England when farmers were exempt from tax, they have remained some what unscathed by the tax legislation pen that has been wielded by National Treasury over the last number of years.
That is of course if you are a farmer. One must remember that many farmers today consult from doctors rooms, advocate chambers—and even from the bank, to name but a few. Farmer are no longer limited to people who get up at dawn to spend their days working the land and tending the flock.
However, the tax courts have held that farming does not mean simply indulging in a country pursuit, and that pastoral activities consist of more than merely grazing animals and planting vegetables.The courts have also held that farming must have some sort of hope for profit on reasonable grounds.
Herein lies the potential downfall for the farmer. Although it is generally accepted that income and net profit in the farming sector is at times dependent on the will of Mother Nature and that losses are fairly common, SARS has clamped down on farming losses incurred by natural person taxpayers who also earn large taxable income from other sources, even if the farming operations are bona fide and on a large scale.
In terms of Section 20A of the Income Tax Act, farming is listed as a suspect trade and subject to certain conditions. Any recurrent losses incurred by a farmer will not be allowed against other taxable income, unless it can be successfully proved to SARS that such farming activities will generate a taxable income in the near future.The effect is that losses incurred by these farmers will only be available for set-off against taxable income from farming operations.
SARS is applying the suspect trade limitation, with its electronic assessment system seemingly being programmed to limit the loss if the criteria are met.The taxpayer may then be required to engage SARS to resolve the dispute, which will lead to the incurral of additional time and costs.This is of course not the case in respect of farmers who do not earn substantial income from other sources.These are regarded by the tax legislation as "real” farmers, and their losses are not limited.
Favourable tax treatment
The calculation of taxable farming profit allows for many favourable deductions and allowances that have the potential of changing a positive accounting and economic profit into a useful tax loss.This is encouraging news for full-time farmers, but this is not necessarily the case for farmers who are subject
to the loss limitation. In these cases, SARS is not interested in the economic or accounting profits, and
merely takes into account the tax losses.
What favourable deductions and allowances, you may ask? Farmers can claim tax depreciation allowances over three years for all farming assets, whereas other taxpayers have varying periods.For opening and closing livestock,farmers can assign tax values to the animals, up to a maximum of R50 for a bull and as low as R6 per ostrich, despite having acquired the animal for a whole lot more. Taking into account that dairy cows are regarded as livestock, the potential for the deduction of dairy cows purchased and on hand at year end is enormous.
In the case of plantations, the closing stock is only regarded as produce once harvested. Unharvested oranges or apples are not regarded as closing produce, while all the costs of fertilisation,irrigation and pest control remain deductible regardless.
Farmers are also subject to the so-called average rate of tax and rating formula in years where taxable farming profit is generated.This has the potential of reducing the resultant tax bill below the level it would have been if the tax tables were applied normally.
Apart from the application of the loss limitation and average tax rate rules, the allowances and tax treatments remain the same,regardless of the farmer being an individual or legal entity.It therefore appears that, at least from a tax treatment point of view,it is favourable to be regarded as a farmer.
Source: By Dirk Kotze (TaxTalk)