Chapter 22
Farming Operations
Introduction
A person carrying on pastoral, agricultural or other farming activities is regarding
as carrying on a ‘farming operations’ for tax purposes.
If a person is carrying on farming operations, that person will be subject to the
ordinary provisions of the Act, but the calculation will be subject to the First
Schedule as mentioned in Section 26(1) of the Income Tax Act, 1962.
A person carrying on farming operations will submit one return at the end of the
year of assessment however, income and expenditure not relating to ‘farming
operations’ will be recorded separately in the same return.
There is no definition of ‘farming operations’ in the Act. Therefore, it is important
to consider the following Income Tax Cases:
ITC 1319 - Genuine intention to farm with prospect of making profit and
ITC 586 - distinguish between farming operations and speculator business.
According to Section 26(1) ’taxable income derived from farming operations’
must arise or accrue directly from farming operations. There must be a direct
connection between income and the farming operations.
Note:
The wording ‘farming operations’ includes only activities connected with
what a farmer derives from his land, however, he needs not be the owner
of the land, but he must enjoy a right to the land and its yield.
Items not included in taxable income:
- Rentals received from the letting of farming assets
- Rentals received from the letting of livestock
- The manufacturing income of a farmer who is carrying on two distinct
trades namely farming and manufacturing. Separate statements of
comprehensive income for his farming operations and his
manufacturing business must be compiled.
Framework: Calculation of taxable income of a
farmer
Farming income (see note 1 for examples farming income items)
xx
Total farming income
xxx
Add: Closing stock (only livestock and produce no consumable stores)
xx
Produce @ lower of cost or market value (harvested/sorted and ready for
sale) xx
Livestock @ standard value
xx
Total farming income after closing stock
xxx
Less: Expenses
(xxx)
Opening stock :
Produce @ lower of cost or market value (harvested/sorted and ready for
sale) xx
Livestock @ standard value
xx
Inheritance/Donations @market value
xx
Livestock purchases
xx
General farming expense
xxx
Capital allowances xx
Net farming income
xxx
Less: Capital Development Expenditure
(xx)
Soil erosion x
Eradication of noxious plants
x
Net farming income before other capital developments
expenditure xxx
Less: Other Capital Development Expenditure (see note 4)
xxx
Taxable farming income
xxx
Total taxable income calculation
Taxable farming income
xxx
Other income
xxx
Gross income
xxx
Less: Exempt income
(xx)
Income
xxx
Less: Deductions
(xx)
Total taxable income
xxx
Note 1. Examples of Farming Income
Sale of produce: Income from the sale of crops, fruits, vegetables, and
other produce.
Sale of livestock: Income from the sale of livestock such as cattle, sheep,
pigs, and poultry.
Forced sales
Subsidies: An amount received by or accrued to a farmer by way of a
grant or subsidy of soil-erosion works or expenditure on farming
development and improvements.
Deemed recoupments
Recoupment par 11
- Domestic consumption: Livestock or produce applied for the farmer’s
private or domestic use or consumption must be included in his
income using cost price, if cost price cannot be readily determined,
the market value of produce or livestock must be applied.
- Donation made of livestock or produce must be valued at market
value.
- Removals from South Africa for purposes other than producing income
from sources within South Africa, valued at market value.
- Livestock distributed as dividends in specie to a holder of a share,
valued at market value.
- Rations: livestock given to farm employees, valued at market value.
- Disposal of livestock or produce at less than market value must be
valued at market value. (less the consideration received if there was
any consideration received)
- Produce or livestock given as livestock feed.
Grazing fees
Letting of farmland if rent received is based on farming profits. Letting of
farming assets would not amount to farming income.
Income received from farming co-operatives if the income received is
based on farming operations.
Note 2. Farming expenses
• Hiring of farming land
• Lease premiums
• Expenses for clearing land
• Repairs
• Purchase of livestock
• Animal feed, fertilisers, and manure
• Veterinary surgeon’s fees
• Wages of farm employees
• Medical services for employees
• Rations
• Packing materials
• Seeds, plants and trees.
• Rates and taxes
• Interest on loans or bank overdrafts used for farming
• Travelling and entertainment expenses
Note: No section 23(a) and (b) deduction.
Note 3. Examples of capital allowances
Section 12B:
- 50, 30, 20 allowance
- 100% of cost for a taxpayer who generates electricity for the purposes
of his trade from photovoltaic solar energy not exceeding 1 megawatt.
- Cannot be claimed on buildings
- Can be claimed in full, no apportionment
- Excludes motor vehicles whose sole or primary function is the
conveyance of persons.
Section 11 (e) Wear and tear
Section 13sex(1) Residential units
Note 4. Paragraph 12
100% deduction subject to limitations
Capital Development Expenditure
(a) Soil erosion (cam create a loss- always deductible)
(b) noxious plants (can create a loss- always deductible)
Other Capital Development Expenditure
(c) Dipping tanks
(d) Dams, irrigation schemes, boreholes and pumping-plants
(e) Fences
(f) The erection or extension, additions or improvement to buildings used
in the connection with farming operations
(g) The planting of trees, shrubs or recurrent plants
(h) The building of roads and bridges used in connection with farming
operations
(i) The carrying of electric power from the main transmission lines to the
farm apparatus
