This first article, in a series of articles, discuss the basics of taxation of farming before delving in to more precise detail to be found in future articles.
Source: SARS.GOV.ZA and their Guide to Taxation of Farming Operations (October 2023 version)
Farming contributes largely to job creation and is a major contributor to the gross domestic product. Just as there are many different types of farming operations, for example pastoral farming, crop farming, plantation farming, aquaculture and game farming, there are also a variety of different methods of conducting farming operations, such as free-range farming, organic farming and conventional farming.
Various factors such as the climate, demand for products as well as the high costs associated with farming have an impact on successful farming. These factors can potentially negatively impact a farmer’s income and expenditure on a regular basis.
To assist farmers, a beneficial set of tax rules applies to farming operations and the income and expenses emanating from such operations. Section 26(1) provides that the taxable income of any person carrying on 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 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 a taxable income from farming operations. The First Schedule may also apply even after farming operations have been discontinued.
The main categories of farming in South Africa are large-scale commercial farming and, to a lesser extent, subsistence farming.
- Commercial farming involves the production of crops and rearing of animals for sale, usually with the use of modern technology. The aim of this type of farming is to make a financial gain.
- Subsistence farming is when only enough crops are grown or animals reared to feed the farmer and the farmer’s family. Usually, there is not much harvest to sell or trade, and what surplus there is if sales are made tends to be stored to last the family until the next harvest.
Subsistence farming is generally practised to provide food for the farmer and not with a profit motive in mind. A person, not carrying on farming operations, falls outside the scope of section 26 and does not benefit from the First Schedule. This will apply even if a subsistence farmer decides to sell surplus produce which are not stored for future use. If sales are made, it is usually minimal in value.
Tax rules applicable to farmers
Section 26(1) of the Income Tax Act states:
“The taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in so far as it is derived from such operations, be determined in accordance with the provisions of this Act but subject to the provisions of the First Schedule.”
The term “person” is defined in section 1(1) and includes:
- an insolvent estate;
- a deceased estate;
- any trust; and
- any portfolio of a collective investment scheme.
Foreign partnerships are excluded.
Any of the entities included in the definition of “person” may therefore apply the First Schedule with regard to the carrying on of farming operations. A person can also include a natural person (whether farming as a sole proprietor or in partnership) and a company.
The terms “taxable income” and “income” are also defined in section 1(1).
“Taxable income” means the aggregate of:
“ (a) the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II to be deducted from or set off against such income; and
(b) all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;”.
The term “income” means “the amount remaining of the gross income of any person for any year or period of assessment after deducting therefrom any amounts exempt from normal tax under Part I of Chapter II”. For purposes of the First Schedule, “farming income” refers to income derived from farming operations only.
While section 26 stipulates the persons and circumstances under which this section will find application, the First Schedule sets out how to compute the taxable farming income. Generally, the sections contained in Chapters 1, II and III of the Act will apply to farmers unless a special rule in the First Schedule provides specific relief or rules for taxation. In such case, the First Schedule will apply. In the event that a farmer receives income from farming activities as well as from other activities, the former income will be subject to section 26 and the First Schedule while the normal income tax rules will apply to the latter income. The taxable income from farming is combined with the taxable income from other sources to arrive at the taxpayer’s taxable income for the year of assessment.
With regard to making a declaration on an income tax return, special provision is made for farming income when a particular tick box is selected. A farmer will therefore be able to declare farming income as well as non-farming income separately on a return. The First Schedule applies regardless of whether a taxpayer derives an assessed loss or a taxable income from farming operations.
Pastoral, agricultural or other farming operations
The term “pastoral, agricultural or other farming operations” is not defined in the Act and guidance is derived from its grammatical meaning, legislation and from case law. The term “pastoral” is defined in the Merriam-Webster Dictionary as “relating to, or composed of shepherds or herdsmen a pastoral people, seminomadic in their habits; devoted to or based on livestock raising”. Goat farmers, pig farmers and game farmers will also be considered as conducting pastoral farming operations.
The term “agriculture” is defined in the Merriam-Webster Dictionary and means: “the science, art, or practice of cultivating the soil, producing crops, and raising livestock and in varying degrees the preparation and marketing of the resulting products.”
In addition to the keeping of livestock for the sale of its meat, dairy farming and raising sheep for wool also fall under the category of farming.
Section 26 refers to pastoral and agricultural farming operations as well as “other farming activities”. The latter term includes farming activities such as horse breeding, fish farming and bee keeping.
Carrying on farming operations
The expression “farming operations” is not defined in the Act and should be interpreted according to its ordinary meaning as applied to the subject matter with regard to which it is used. The question of whether a person is carrying on farming operations is one of fact and must be decided considering all the facts of a particular case.
When evaluating whether a person is carrying on farming operations and whether a genuine intention exists, various factors must be taken into consideration.
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 not a requirement that a person has to own the land on which the farming operations are carried on but the person must have a right to the land and the yield from it. The mere fact that a person is the owner of the land on which farming operations are conducted by another person does not necessarily result in the owner being considered to be conducting farming operations.
Income derived from farming operations
Under section 26, a person must obtain or derive taxable income from conducting farming operations. To “derive” is to obtain something from a specified source.
Generally, a farmer’s main source of income will be from the sale of the produce grown and harvested or from the sale, breeding or slaughtering of livestock. A farmer may also supplement income by conducting other farming operations which will also be included in income.
These supplementary operations that form part of farming operations include, but is not limited to:
- the sale of manure;
- the sale of firewood;
- the letting of grazing rights if the rental amount is derived from farming proceeds;
- the sale of plantation and forest produce;
- prize money received, for example, best wool or biggest pumpkin; or
- compensation received from the Government for the compulsory destruction of livestock due to disease.