Page 602 - SAIT Compendium 2016 Volume2

IN 69 Income Tax acT: InTeRPReTaTIon noTes IN 69
In determining whether or not game-viewing fees (for example, the fee paid to go on a game drive) constitutes income from game farming, it is necessary in the rst instance to determine whether or not the particular taxpayer is conducting a farming operation. This 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 pro t 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 uses such as the hunting and sale of the game may be a part of a valid farming operation. However, when game viewing is incidental to activities which do not constitute farming activities, the income from game viewing will not constitute income from farming operations. For example, certain eco-tourism operations the purpose of which is tourism and accommodation and those elements are the revenue and pro t generators, while the game viewing serves as an attraction and is 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 the deductions provided for under the First Schedule can only be used to reduce the income derived from farming operations.
4.3 Livestock
4.3.1 Meaning and nature of livestock Meaning of ‘livestock’
Various paragraphs of the First Schedule apply to livestock. The word ‘livestock’ is not de ned in the First Schedule or the main body of the Act. The word is described in the New Shorter Oxford English Dictionary as—*
‘animals kept or dealt in for use or pro t’.
The above meaning was con rmed in relation to the First Schedule in R Koster & Son (Pty) Ltd and another v CIR in which Nicholas JA stated the following:†
‘Paragraph 2 of the First Schedule refers to all livestock. This is a general term which comprises any animals kept or
dealt in for use or pro t.’
Livestock thus includes animals held for breeding purposes (often referred to as xed capital assets) and those held for resale (often referred to as oating capital assets).
The livestock must be used in the farming operations to fall within the ambit of the First Schedule.
Nature
The general rule in paragraph 2 is that all farmers, including companies carrying on farming operations, are required to include in their 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‡ (see 4.3.2 for the determination of the values).
Once an animal is classi ed as livestock any consideration received or accrued on its disposal must be included in the farmer’s gross income regardless of whether the animal was acquired as xed capital or oating capital. This was con rmed in R Koster & Son (Pty) Ltd & another v CIR§ in which the court cited with approval the following passage from Farmer v COT¶ in which this principle was upheld in relation to equivalent provisions of the Southern Rhodesia Income Tax Act:
‘The main provision of this section is that every farmer is bound to include in the return rendered by him for income tax purposes, i.e., for the determination of his taxable income, the values of all livestock and produce held by him and not disposed of at the beginning and end of each year of assessment. The section has a wide embrace, both as to the farmer affected and the class of livestock. It makes no distinction between ranching stock and dairy, sheep, pig or other livestock, and it treats livestock in the same category as produce; in other words, it abolishes the importance or necessity of inquiring into the purpose with which the farmer has acquired his livestock or what his scheme or method of pro t making is, and treats all the farmer’s livestock and produce as his oating capital. In respect of these two commodities the farmer is treated, willy nilly, as an ordinary trader for income tax purposes. Dependent upon the difference in the value of his livestock at the commencement and the close of each year, there is either an accrual or a loss of his oating capital; if the former this forms part of his income, if the latter the loss is deducted from his income. His sales during each year of his livestock of whatever category, whether of part or the whole of his herd, form part of his income and his losses, whether mortality or other losses, are deducted from his income. This basis of computation for income tax purposes has been imposed compulsorily upon the farmer by legislation, and the Commissioner of Taxes and the Courts are no longer concerned to inquire whether in a particular farming business the farming livestock can be treated as xed capital, because it must now be treated as part of the stock in trade of his farming business.’
The trade of farming is speci cally excluded from the opening and closing stock provisions in section 22.** The opening and closing stock provisions in paragraph 3 only deal with livestock and not consumable stores. Accordingly, a farmer’s consumable stores, which include items such as fuel, spare parts, fertilizer and packing materials, do not need to be brought into account in opening stock or closing stock. ††
Application to game farming
* Lesley Brown 4 ed (1993) Oxford University Press Inc., New York, United States of America in vol 1. † 1985 (2) SA 831 (A), 47 SATC 23 at 32.
‡ Paragraph 3(1).
§ Above, 47 SATC 23 at 33.
¶ 1944 SR 80, 13 SATC 158 at 159.
** Amounts to be taken into account in respect of values of trading stock.
†† Section 22(8) still applies to consumable stores of farmers, but does not apply to livestock and produce which are
covered by paragraph 11.
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