TAX302 - Farming PDF

TAXATION 3 - RTV302/RGTV302 FARMING  TOPIC PROFICIENCY KNOWLEDGE Capital allowances (s12B) X 3 Let farming land – soil erosion (s17A) I 2...

TAXATION 3 - RTV302/RGTV302 FARMING  TOPIC PROFICIENCY KNOWLEDGE Capital allowances (s12B) X 3 Let farming land – soil erosion (s17A) I 2 Trading stock s22 (excludes farming) X 3 Inclusion in Taxable income (s26) X 3 Farming trading stock & limits X 3 Application of trading stock X 3 Capital expenditure (s12B & para 12) X 3 Forced sales & rating X 3 Drought & land bank X 3 Sugar cane / plantations X 3 Other issues A 1 NOTE: Farming not part of CA qualifying exams thus above refers to 3rd year tax! Readings: IT Act: ss12B, 17A, 22, 26, First Schedule Interpretation Note 69 – Game farming (12/02/2013) NOTES: Ch 22 Objective: To examine the additional/specific provisions of the Income Tax Act as they relate to farming; To demonstrate that normal tax principles apply except where special provisions are applicable. Outcomes: Explain and apply the taxation provisions relating to farming operations in practical situations. Concepts/Terminology: Farming; Farming income; Standard Value; Livestock; Produce; Standing Crops; Capital Development Expenditure; Rating/Averaging Concession; Average Taxable Income from farming; Sheep lease; Unredeemed Capital Development Expenditure  FARMING What is farming? The term is not defined… therefore CASE LAW. ITC 1319, 1980 42 SATC 263 Must be intention to farm with reasonable prospect of profit H v COT (ITC 1324), 1980 43 SATC 22(Z)) Not a country pursuit simply as an interest/enjoyable way of life ITC 1424, 1986 49 SATC 99 Genuine intention to farm with the hope of ultimate profit confirmed by C.SARS v SMITH, (2002 (6) SA 621 (SCA)), 65 SATC6 “… farming, like any other enterprise, must show a possibility of profit …” and also contended was not bona fide farming.  FARMING What is farming income? The term is not defined… therefore CASE LAW. ITC 1548 55 SATC 26 activities carried on by farmer on own land & from which derives income (need not be owner of land but must have right to use the land) CIR v D + N Promotions (Pty) Ltd 1993 NPD 55 SATC 89  must be directly from farming operations  rental income from letting farming property & equipment – not farming Game farming income: Not farming income: from accommodation,  sale of live game. catering, admission fees for persons spending holidays on farm and fees for acting as guides  slaughter and sale of game meat, carcasses and skins. for holiday makers  fees received from hunters to hunt the game.  income derived from supplying guides and trackers used in a hunting expedition.  FARMING Determining taxable income from farming operations Section 26 of the Act provides that the taxable income of any farmer shall be determined with the provisions of the Act, but is subject to the First Schedule, which mainly deals with livestock, produce and capital development expenditure.  FARMING Trading stock for farming purposes Section 22 trading stock – not applicable as it relates to stock “other than farming”  1st Schedule para 2: include with income tax the value of all livestock and produce at beginning and end of YOA. Value of ALL livestock & produce held & not disposed of. Consumable stores & other items – s11(a) deductions – not part of stock for farming purpose. Livestock refers to all animals used by farmer in farming operations. Produce is what the farmer grows or what is produced by the livestock e.g milk and wool.  FARMING How is trading stock valued? OPENING STOCK  Value of closing stock at the end of the previous year Plus  Market value of stock acquired other than by purchase, natural increase or ordinary course of farming operations - stock received by a farmer as a donation, inheritance or in specie dividend Plus  Market value of stock not previously held for farming, but now so held. If a farmer commence/recommence farming during the year:  Value of stock on day before recommenced Plus  Market value of stock as above (inheritance, donation, in specie dividend)  FARMING How is trading stock valued? CLOSING STOCK  Livestock is valued at standard value (it is lower than Market value and is fixed by Regulation in terms of the Act) Farmer may choose own standard values – but may not differ by > 20% of fixed values If no standard value, a value must be agreed with the Commissioner e.g game animals  Produce must be valued at a fair & reasonable value - usually cost to farmer if can be established. Inherited/donated: MV in opening & closing stock Standing crops not yet harvested are NOT stock for tax purposes Harvested produce on hand at year-end = farming stock  FARMING STANDARD VALUES  FARMING Example 1 Tax Treatment oflivestock At previous year-end farmer had following: MV Standard 1 Bull 220 000 50 30 Cows 7 500 40 10 Calves 3 000 4 During the year the followingoccurred Died 2 cows Sold 10 cows each @ 8 000 Born 12 calves Inherited 40 cows Opening stock: Prior closing stock Standard Market Stock 1 bull 50 220 000 50 30 Cows 40 7 500 1 200 10 Calves 4 3 000 40 40 Inherited 40 8 000 320 000 321 290 Closing stock 1 bull 50 220 000 50 58 Cows 40 8 000 2 320 12 calves 4 3 000 48 10 heifers/tollies 14 4 000 140 2 558 Effectively a deduction for livestock inherited IF THIS IS ALL THAT HAPPENDED: Income 80 000 Opening stock (321 290) Closing stock 2 558 Loss for the year (238 732)  FARMING Domestic consumption, donations & in-specie dividends of trading stock Paragraph 11 (similar to s22(8)) contains provisions aimed at non-trade disposals of livestock and produce.  Recoup (include in income) Private/domestic consumption Cost or MV where cost cannot be determined  MV in all other cases – including in specie distributions (less proceeds where sold below MV)  Applied/consumed in ordinary course (e.g. rations – it is given to its employees) s11(a) deduction as well (@ MV)  FARMING Purchase of livestock Para 8: Limitation on deduction for purchase of livestock  The purchase of livestock is deductible ito s11(a) – however the deduction of the expenditure is limited to the farmer’s income for the year. The amount disallowed is carried forward to the next YOA and deemed to be acquisition of livestock in that YOA. The limitation does not apply to livestock purchased and no longer held by the farmer at the end of YOA. Let’s have a look at the limitation…  FARMING Purchase of livestock - limitation Income from farming – non farming income  Income received/accrued from farming for year xxx excluded  Plus: Standard value closing stock xxx  Less: Value opening stock (as per above) (xxx) = LIMIT of s11(a) deduction for purchase of livestock Additional allowed: If MV of closing < carried forward amount + opening @ standard  DISSALLOWED portion xxx  Plus: Standard value OPENING stock xxx  Less: MV of CLOSING stock (xxx) = ADDITIONAL s11(a) deduction  FARMING EXAMPLE 2 FARMING COMPANY (Sheep farmer) Year-end: June single shareholder, is also director and CEO of thecompany. For 2020 year of assessment: in respect of livestock Quantity Cost S. value M.value R Sales 2 154 1 000 6 1 500 3 231 000 Opening stock sheep 500 900 6 1 500 lambs 50 100 2 800 Natural movement lambs born 100 0 2 800 lambs died 40 200 2 800 lambs-sheep 50 300 2 800 sheep died 200 900 6 1 500 Purchases sheep 3 000 1 200 6 1 500 3 600 000 Slaughtered - sheep rations 30 1 200 6 1 500 own consump. 15 1 200 6 1 500 Donations sheep to PBO 6 1 200 6 1 500 received 5 1 200 6 1 500 Dividend in specie sheep 200 1 200 6 1 500 Closing stock sheep 950 1 200 6 1 500 lambs 60 0 2 800 REQUIRED: determine the tax payable by the company for the 2020 year of assessment.  FARMING EXAMPLE 2 Suggested solution R Sales - farming income 3 231 000 Recoupments donations made (PBO) 6 x mv 1500 9 000 rations 30 x mv 1500 45 000 own consumption 15 x mv 1500 22 500 (is company, thus taxable benefit to shareholder assuming is also director/employee. If natural person, then cost) dividend in specie 200 x mv 1500 300 000 376 500 Farming income 3 607 500 Opening livestock sheep 500 x std val 6 3 000 lambs 50 x std val 2 100 Donation received 5 x mv 1500 7 500 -10 600 Closing stock sheep 950 x sv 6 5 700 lambs 60 x sv 2 120 5 820 Limit of livestock purchases 3 602 720 Purchases 3000 x cost 1200 -3 600 000 All allowed: does not exceed limit  FARMING Deductions rations -45 000 own consumption (value of benefit - not if natural person) -22 500 Both are in production of trade income Taxable income before donation -64 780 Donation limited to 10% of -64780 =-6478 0 TAXABLE INCOME -64 780 If it was for the 2023 year of assessment, the tax rate would be 27% Tax at 28% 0 DIVS TAX (Company tax) 20% x 300000 60 000 NOTE: births, deaths and changes do not affect TI except that they change stock quantities  FARMING Capital Expenditure A farmer’s capital expenditure might be subject to one of the following provisions: Paragraph 12 of First Schedule Or Special allowance - s12B Or  Wear and tear allowance - s11(e) Order of deductions: 11(e) & 12B first – certain para 12 deductions limited to taxable income  FARMING Capital Expenditure – Paragraph 12 Expenditure incurred on: a) eradication of noxious (poisonous) plants & alien invasive vegetation b) prevention of soil erosion Deductible in full even if it creates an assessed loss. c) dipping tanks d) dams, irrigation schemes, boreholes, pumping plants e) fences f) erection/extension/additions/improvements to farm buildings (not repairs – s11(d) & excl domestic buildings - Employees housing: on/after 21/10/08: s13sex OR 13sept g) planting trees, shrubs, perennial plants for listed items + development of area (note: NOT plantations) h) building of roads, bridges for farming operations i) carrying electric power from main transmission lines to farm apparatus Limited to TAXABLE INCOME from farming.  FARMING Capital Expenditure – Paragraph 12 If the expenditure incurred in paragraphs c) to i) exceed the farming taxable income – the excess carried forward to the next YOA RECOUPMENTS: Paragraph 12(1)(B) allows for a recoupment on the sale of moveable asset where the costs were deducted in terms of paragraph 12 – recoup up to the proceeds, however limited to the amount of allowance previously granted. s8(4)(a) recoupment is not applicable in respect of any allowance in terms of assets dealt with in paragraph 12!  FARMING Domestic consumption, donations & in-specie dividends of trading stock Paragraph 11 (similar to s22(8)) contains provisions aimed at non-trade disposals of livestock and produce.  Recoup (include in income) Private/domestic consumption Cost or MV where cost cannot be determined  MV in all other cases – including in specie distributions (less proceeds where sold below MV)  Applied/consumed in ordinary course (e.g. rations – it is given to its employees) s11(a) deduction as well (@ MV)  FARMING Summary of s13sex 5% allowance on cost new/unused improvements of new/unused residential units or: unit solely for trade in Republic & 5 or more units in RSA If low-cost: additional 5% (i.e. 10% allowance) Low-cost residential unit: apartment cost max R350 000 House cost max R300 000 & Monthly rental not exceed 1% of cost (increase pa) NOTE: is a 7th schedule benefit to employees  FARMING EXAMPLE 3 Farmer aged under 65 Year 1 2020 yoa Income Interest from savings (not tax-free) 30 000 Taxable income fromfarming 300 000 Capex eradication of noxious & alienplants 100 000 cost of dam 150 000 irrigation equipment 20 000 roads 10 000 erection of 5 houses for 10 employees 1 200 000 Taxable income year 1 Taxable income fromfarming 300 000 Capex eradication of noxious & alienplants #12(1)(a):no limit -100 000 5 houses (1200000/5= 240000 = low cost 1200000 x10% = s13sex : no limit -120 000 80 000 cost of dam #12(1)(d) 150 000 irrigation equipment #12(1)(d) 20 000 roads #12(1)(h) 10 000 180 000 Limited to taxable income fromfarming -80 000 -80 000 c/f to next year ofassessment 100 000 Taxable income fromfarming 0 Interest from savings (not tax-free) 30 000 Less exemption -23 800 6 200 Taxable income 6 200  FARMING Year 2 2021 yoa Income Interest from savings (not tax free) 33 000 Taxable income from farming 800 000 Sale of irrigation equipment(movables) 10 000 Capex fence 30 000 Taxable income - year 2 Taxable income from farming 800 000 Low cost housing 1200000 x10% = s13sex -120 000 680 000 Capex: Brought forward 100 000 less recoupment - irrigation equip. -10 000 90 000 fence (limited to TI) #12(1)(e) 30 000 -120 000 Taxable income from farming 560 000 Interest 33 000 Exempt - individual -23 800 9 200 Taxable income 569 200  FARMING IF TAXABLE INCOME FROM FARMING was 24 000 Farming (after low cost housing) 24 000 Capex b/f 100 000 recoupment (10 000) 90 000 fence 30 000 Total capex 120 000 BUT limited to farming TI (24 000) (24 000) c/f to 3rd year 96 000 0 & therefore taxable income is interest only: Interest 33 000 Exempt - individual (23 800) 9 200 Taxable income 9 200  FARMING Capital Expenditure – section 12B Machinery, implements, utensils and articles (other than livestock), and improvements owned & brought into use for 1st time for farming by that taxpayer (not necessarily new &/ unused)  Allowance: 50% / 30% / 20% – on cost (cash cost @ arm’s length)  No apportionment for part of year – no s11(e) but s11(o) and recoupment s8(4)(a)  Specifically excluded  motor vehicles (sole/primary function is conveyance of persons)  caravan  aircraft unless used solely/mainly for crop spraying  office furniture/equipment Apply s11(e) W&T to exclusions and to assets that do not fall into paragraph 12. S12B & s11(e) NOT limited to TI from farming  FARMING Capital Expenditure – section 12B No deduction may be allowed in terms of section 12B if:  The assets were disposed of by the taxpayer in the previous year of assessment; or  Assets were let under any lease other than an operating lease, unless  The lessee under the lease derives income from the carrying on of a trade; and  The period of the lease is at lease 5 years or a shorter period allowed by the Commissioner.  FARMING Section 12B: Capital allowance (BIOFUEL, WIND, SUN, WATER) Assets used by a taxpayer for the purpose of his trade in the generation of electricity from: The taxpayer must own the asset or must - Wind (wind power) have purchased it under an instalment credit agreement (in which case the seller - Sunlight (solar energy), being cannot claim the allowance). Photovoltaic solar energy of more than 1 megawatt Photovoltaic solar energy not exceeding 1 megawatt Concentrated solar energy - Gravitational water forces (hydropower) (not more than 30 megawatts) - Biomass (comprising organic wastes, landfill gas or plants/plant material) Any improvements made to any foundation or supporting structure are also subject to the allowance, if the foundation or supporting structure is part of the asset and was brought into use on/after 1 January 2013 – allowance can be claimed! Allowance: 50% / 30% / 20% – on cost (s12B(2))  FARMING ACQUISITION OF A FARM Para 12 – not expenditure incurred – no allowances Will a separate valuation be sufficient? SARS does not accept for allowances! S12B – allowances on cash cost: therefore ensure a valuation S13sex: not new and unused – no allowances Growing crops – separately valued = s11(a) deduction – no closing stock unless harvested and not sold Livestock – market value purchased – standard value as closing stock  FARMING Forced sales – Paragraph 13 This paragraph gives the farmer relief where he has been forced to sell livestock due to drought, disease, plague, fire.  Deduct cost of replacement stock if replaced within 4 years of end of YOA, the farmer has the option of to deduct the cost of the replacement stock: In YOA in which forced sale took place; OR Taxpayer has a In YOA in which replacement stock purchased choice? Deduction must be claimed within 5 years after close of YOA in which sold If the farmer purchases livestock to replace stock that he sold in terms of a Government livestock reduction scheme, then the same provisions as above apply, except that: Taxpayer has a He has 9yrs after close of current yr to replace stock; and choice? He may not elect this para if taxed ito para 19 Deduction must be claimed within 10 years after close of YOA in which sold  FARMING Drought relief – Paragraph 13A If a farmer receives proceeds from the sale of his livestock because of draught and has deposited his proceeds or a portion of it with the Land and Agricultural Bank of SA within 3 months of receiving – not Gross Income.  If withdraw within 6 months after end of YOA – taxed as if concession does not apply  If leaves deposit for 6 yrs +: Gross income on last day of year 6  Withdraw after 6 month period: tax on day of withdrawal  Death/insolvency within 6 yrs – deemed Gross income on day before death/insolvency Farmer must notify the Commissioner using a prescribed form to qualify for this concession  FARMING Plantation Farming “plantation” artificially established tree, not being a #12(1)(g) tree  Deem trees to be separate from land (14(1))  Receipts: trees deemed separate from land = revenue receipts (land = capital)  Expenditure: Deduct in full: - cost of establishing plantation & - cost of maintaining plantation. Limited to gross income from that plantation – c/f excess: - Acquisition of a plantation Plantation income subject to rating formula - para 15(3) - IF farmer not chosen para 19 general rating  FARMING Rating formula – paragraph 15(3) This provision is applicable to farmers (other than a Co or CC) that derives taxable income from the disposal of plantations or forest produce; and  the taxable income exceeds the annual average taxable income from plantations for the preceding years, then the excess (current year plantation taxable income less previous 3 years average plantation taxable income) is subject to tax in terms of the rating formula. The excess is “C”. (If average = 0, current year is C) WHAT IS THE RATING FORMULA? Y = { A/ (B+D-C) } × B Y= Normal tax to be determined (before rebates) A = Normal tax (before rebates) on (B + D – C) i.e. TI before abnormal inclusions B= Current year total taxable income C = The excess plantation taxable income = Current year plantation TI less average D = Current contribution to RETIREMENT FUNDS due solely to rating inclusions  FARMING Averaging concession – paragraph 19 Farmer (natural persons) may elect – must be w/in 3 months of end of year of assessment Formula the same as previous slide, other than C: C = EXCESS over AVERAGE TAXABLE INCOME FROM FARMING  (Current + previous 4 years taxable farming income) / 5 - Part year taken as a full year – if farmed for less: average over years farmed - Losses in previous 4 years – taken into account - Average limited to 0  FARMING EXAMPLE Farming taxable income/(loss) current year 200 000 & other income 84 100 current - 1 180 000 current - 2 50 000 current - 3 (40 000) current - 4 20 000 current - 5 30 000 Average = (200 + 180 + 50 – 40 + 20)/5 = R82 000 C = actual less average = 200 000 – 82 000 = R118 000 B = Actual taxable income for year: 200 000 + 84 100 = 284 100 A = Tax on (B–C) = tax on (284 100 – 118 000) = 166 100 Tax for yoa = Y = [A/(B+D-C)] x B = [(18% x 166 100) / (284 100 + 0 – 118 000)] x 284 100 = [29 898 / 166 100] x 284 100 = 18% x 284 100 = 51 138