Page 601 - SAIT Compendium 2016 Volume2

IN 69 Income Tax acT: InTeRPReTaTIon noTes IN 69
In evaluating the genuineness of the taxpayer’s intention the nature and extent of the enterprise will be relevant. The following examples of factors to be considered were provided by Erasmus J in ITC 1698:*
‘[T]he size and location of the property on which the operation is being conducted, the portion of that property being used for that purpose, capital expenditure, turnover, labour, the regularity and purposefulness of the activity, the time and effort spent thereon by the taxpayer in relation to his other gainful activities, if any, and the existence of a real prospect of pro t (or lack thereof). The list is not exhaustive and the permutations of such activities are in nite. None of these considerations is necessarily in itself decisive.’
Regard can also be had to the factors set out in section 20A (3) – see 4.8.
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. This principle was illustrated in ITC 1548† in which the court found that the shearing and harvesting activities undertaken by a farmer on behalf of others on their land was not farming and neither were the transport services the farmer provided – the farmer was performing a service for other farmers and did not have a right to those farmers’ land or the yield from it.
The factors referred to above are not exhaustive and whether or not farming operations are being conducted will depend on all the facts and circumstances of each case.
The same test, used to determine whether a person is carrying on farming operations, applies to game farming.
Having regard to the above general principles, 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 person who owns land and 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 operations. The person would have to convince the Commissioner that game is being raised with a genuine pro t 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 pro tably.
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, however in all instances there would be a level of active involvement appropriate to the particular species and farming operation.
4.2 Game-farming income
4.2.1 Income derived from game farming
Section 26 (1) only applies to income derived from the carrying on of pastoral, agricultural or other farming operations. The Supreme Court of Appeal in CIR v D & N Promotions (Pty) Ltd§ considered the meaning of the term ‘derived from’. The court quoted with approval the explanation of the meaning of this term from the court a quo¶ which held that—**
‘the income and the source from which it arises, namely the farming operations, which embraces numerous agricultural
activities, must be directly connected. An indirect connection or remote one will not suf ce’. Also in the court a quo Levinsohn J stated that—††
‘the legislature intended farmers to be placed in a privileged position as far as their entitlement to deduct capital expenditure from farming income and hence the concept of income derived from farming operations ought to be strictly construed, see Ernst v Commissioner for Inland Revenue 1954 (1) SA 318 (A) at 323C–D.’
A taxpayer may earn income from distinct businesses, namely, farming operations and other operations—it is only the income which is directly connected to the farming operations which will fall under the ambit of section 26(1). For example, in ITC 1285‡‡ 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 operations. Some activities will generate income directly from the game- farming operations 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 operations: 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. See 4.2.2 for income not derived from game-farming operations.
4.2.2 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 operations and accordingly will not be regarded as game-farming income:
• •
Accommodation and catering.
Admission charges payable by persons spending holidays on the farm.
* (2000) 63 SATC 161 (SEC) at 170.
† (1991) 55 SATC 26 (C).
‡ ITC 1698 (2000) 63 SATC 161 (SEC); ITC 1414 (1986) 48 SATC 174 (T).
§ 1995 (2) SA 296 (A), 57 SATC 178.
¶ CIR v D & N Promotions (Pty) Ltd 1993 (3) SA 33 (N), 55 SATC 89.
** At 57 SATC 183.
†† At 55 SATC 97.
‡‡ ITC 1285 (1978) 41 SATC 73 (NC); Rex v Porterville Ko-op Landbou Mpy Bpk [1962] 1 All SA 278 (C).
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