Source: INTERPRETATION NOTE 69 (Issue 4) dated 26 June 2025
Income Tax Act 58 of 1962, Section 26 and the First Schedule
Section 26(1) provides 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 details the computation of taxable income derived from pastoral, agricultural or other farming operations.
The taxable income from farming operations is combined with the taxable income from other sources to arrive at the taxpayer’s taxable income for the year of assessment.
The First Schedule applies regardless of whether a taxpayer derives an assessed loss or taxable income from farming operations. The First Schedule may also apply even after farming operations have been discontinued.
Section 26 and the First Schedule apply to game farming, since it comprises farming operations.
Application of the law
Farming operations
The First Schedule applies to any person who derives taxable income from carrying on pastoral, agricultural or other farming operations. Such a person can include an individual (whether farming as a sole proprietor or in partnership), a deceased estate, an insolvent estate, a company, a close corporation or a trust. The terms “agricultural” and “farming operations” are not defined in the Act and should be interpreted according to their ordinary meaning as applied to the subject matter about which they are used.
Whether a person is carrying on farming operations is a question of fact that must be decided based on all the facts of a particular case.
Not every activity, like farming, will constitute “farming operations”. This principle was confirmed by Heher AJA in the Supreme Court of Appeal in C: SARS v Smith when he stated the following:
“In ordinary parlance, the phrase ‘carrying on farming operations’ is capable of several meanings. In the context of s 26(1), it could mean simply ‘a particular form or kind of activity’ or it could bear a more commercial nuance, ‘a business activity or enterprise’.
The Act is directed at taxing profit-making activities. There is no apparent reason why the legislature should have intended a taxpayer who farms as a hobby or who dabbles in farming for his own satisfaction to receive the benefits conferred by the First Schedule.”
An example of the above principle can be found in ITC 13247 (a court case) in which it was held that a grower who merely intended to sell crops that were surplus to his needs was not carrying on farming operations.
In order to fall within the First Schedule, a farming operation needs to be a trade of the taxpayer, and there must be an overall profit-making intention. It is now settled law that the test for determining whether a taxpayer is carrying on farming operations is a subjective one, that is, one based on the taxpayer’s intention.
The same principles for determining whether a person is carrying on farming operations apply to game farming.
The activity of breeding and running game on a farm for the purpose of marketing the live animals, hunting the animals for a fee or slaughtering them for the meat, falls within the ambit of game farming. A land owner who occasionally allows hunters to, for example, cull the game on the land, is unlikely to be regarded on such activities alone to carry on game farming. The person would have to satisfy the Commissioner that the game is being raised with a genuine profit intention before the activities would be regarded as carrying on farming operations.
An occasional culling is, in isolation, unlikely to indicate and support a contention that there was a genuine intention to carry on farming activities profitably.
Raising livestock generally involves purchasing, breeding and selling or using the particular animals. The facts and circumstances of a particular case are critical because, for example, in some cases, the regular purchasing of breeding stock will be required, and in other cases, regular purchasing will not be required. In addition, the degree of day-to-day, hands-on involvement of a game farmer in raising livestock is likely to vary depending on the particular species of game. In all instances, however, there would be a level of active involvement appropriate to the particular species and farming operations.
Game farming income
Income derived from game farming
Section 26(1) applies only to income derived from the carrying on of pastoral, agricultural or other farming operations.
A taxpayer may earn income from distinct businesses, namely, farming operations and other operations – it is only the income directly connected to the farming operations that falls under the ambit of section 26(1). For example, in ITC 128519, the court found that the prize money from racing horses, which the breeder had initially intended but had failed to sell, was not part of the taxpayer’s stock farming and horse breeding business and did not therefore fall under section 26(1).
The same principle applies to game farming. Some activities will generate income directly from the game farming and will be regarded as game farming income, while other activities and the income derived from them will not be regarded as such.
The following types of income are regarded as being derived directly from game farming:
• Income from the sale of live game.
• Income from the slaughter and sale of game meat, carcasses and skins.
• Fees received from hunters to hunt the game.
• Income derived from supplying guides and trackers used in a hunting expedition.
Income not derived from game farming
The income earned from the following activities is not regarded as having the required direct connection to game farming and accordingly will not be regarded as game farming income:
• Accommodation and catering.
• Admission charges payable by persons spending holidays on the farm.
In determining whether a game-viewing fee (for example, a fee paid to partake in a game drive) constitutes income from game farming, it is necessary to determine whether the particular taxpayer is conducting a farming operation. This determination will depend on the facts and circumstances of the particular case and will take into account whether the taxpayer has a genuine intention to make a profit from the raising of livestock and whether the objective review of all the facts supports that contention.
For example, game viewing conducted in conjunction with other activities such as hunting and the sale of game may be a part of a valid farming operation. By contrast, income from game viewing incidental to activities not comprising farming activities will not constitute income from farming operations. For example, certain eco-tourism operations may derive their primary source of income from tourism and accommodation, while game viewing may serve as an attraction and be an incidental revenue generator.
Income derived from activities which give rise to income from game farming and those which do not will have to be accounted for separately, since specified deductions under the First Schedule are restricted to income derived from farming operations.
Livestock
Various paragraphs of the First Schedule dictate how livestock should be accounted for by a farmer.
Livestock thus includes animals held for breeding purposes (often referred to as fixed capital assets) and those held for resale (often referred to as floating capital assets).
The livestock must be used in the farming operations to fall within the ambit of the First Schedule.
Nature of “livestock”
The general rule in paragraph 2 is that all farmers, including companies carrying on farming operations, are required to include in their income tax returns the value of their livestock held and not disposed of at the beginning and at the end of each year of assessment. The value of livestock held and not disposed of at the end of the year of assessment (“closing stock”) is included in income, and the value of livestock held and not disposed of at the beginning of the year of assessment (“opening stock”) is allowed as a deduction from income.
Once an animal is classified as livestock, any consideration received or accrued on its disposal must be included in the farmer’s gross income, regardless of whether it was acquired as fixed capital or floating capital.
The trade of farming is specifically excluded from the opening and closing stock provisions in section 22. The opening and closing stock provisions in paragraph 3 deal only with livestock and not consumable stores.
A farmer’s consumable stores, which include items such as fuel, spare parts and packing materials, do not need to be brought into account in opening stock or closing stock. Section 22(8) will apply to consumable stores of farmers, but does not apply to livestock and produce which are covered by paragraph 11.
Application to game farming
A game farmer is generally involved in the activity of breeding and running game on a farm for the purpose of marketing the live animals, hunting the animals for a fee or slaughtering the animals for meat. Game forming part of farming operations clearly falls within the definition of livestock considered above and is accordingly regarded as livestock for purposes of the First Schedule.
Animals which are not part of the farming operations, that is, animals that the farmer is not raising with the intention of exploiting commercially, will not fall within the scope of the First Schedule. For example, a game farmer may have hyenas, foxes or rodents on the farm which are not part of the farming operation and therefore do not fall within the First Schedule.
Under paragraph 2, a game farmer must include in the income tax return the value of all livestock “held and not disposed of” at the beginning and end of each year of assessment.
Once game livestock has been sold under an unconditional contract and the taxpayer no longer has legal ownership of it but is unconditionally entitled to the consideration for it (that is, the consideration constitutes gross income in the taxpayer’s hands), the game livestock will no longer be considered to be “held and not disposed of” for the purposes of the First Schedule. Game livestock disposed of under an instalment credit agreement, which provides that ownership will pass only once the whole or a portion of the purchase price has been paid, is regarded as having been disposed of and hence must be excluded from closing stock. In these circumstances, section 24(1) deems the purchase price to be included in gross income when the agreement is entered into.
The expression “held and not disposed of” therefore means livestock owned by the taxpayer which has not been disposed of.
The question of ownership is particularly relevant to wild game because, under the common law, wild game are regarded as res nullius, that is, things owned by nobody but which can be owned. Ownership is established by taking control of the animal with the intention of being the owner. Typically, in the game farming context, this is achieved by erecting fences around the farm.
The common law position has been modified by the Game Theft Act 105 of 1991 (Game Theft Act). This Act ensures that a farmer remains the owner of game that escapes from the farm.
The next article will discuss the principles of opening and closing stock, the cost of acquiring game, and the limitations of expenditure and allowances.