Page 604 - SAIT Compendium 2016 Volume2

IN 69 Income Tax acT: InTeRPReTaTIon noTes IN 69 4.3.4 Limitation under paragraph 8 of the First Schedule
Paragraph 8 reads as follows:
8. (1) Where any farmer has during any year of assessment incurred expenditure in respect of the acquisition of livestock, the deduction which may be allowed to him under section 11 (a) of this Act in respect of the cost price of such livestock shall be limited to an amount which, together with the value of livestock held and not disposed of by him at the beginning of such year, does not exceed the income received by or accrued to him from farming during such year and the value of livestock held and not disposed of by him at the end of such year.
(2) Any amount which has been disallowed under the provisions of subparagraph (1) shall be carried forward and be deemed to be expenditure incurred by the farmer in respect of the acquisition of livestock during the succeeding year of assessment.
(3) The provisions of this paragraph shall not apply—
(a) in any case where it is shown by the farmer that livestock the cost of which falls to be dealt with under such
provisions is no longer held and not disposed of by him; and
(b) to so much of any expenditure (including any amount which has been carried forward under the provisions
of subparagraph (2)) which falls to be disallowed under subparagraph (1) as, together with the value of livestock held and not disposed of by him at the beginning of the year of assessment, exceeds such amount as is shown by him to be market value of all livestock held and not disposed of by him at the end of such year.
Paragraph 8 provides that the deduction of expenditure incurred during the year of assessment for the acquisition of livestock, which may be allowed under section 11 (a) for the cost price thereof, is ring-fenced. The deduction available is limited to the sum of the income received and accrued from farming operations plus the value of the livestock held and not disposed of by the farmer at the end of the year of assessment less the value of livestock held and not disposed of by the farmer at the beginning of the year of assessment. Any amount not allowed as a deduction will be carried forward to the succeeding year of assessment and will be deemed to be expenditure incurred in that year (and hence subject to potential limitation in the succeeding year depending on the facts).
This potential limitation only applies to the deduction which may be allowed under section 11 (a). Although opening stock forms part of the limitation calculation under paragraph 8, the opening stock deduction* is not itself subject to the paragraph 8 limitation.
See 4.3.2 for a discussion on the determination of the opening and closing stock values to be taken into account for game livestock— the values will often be nil.
The potential limitation is assessed on the totality of all the farmer’s livestock regardless of its nature. For example, if a taxpayer conducted sheep farming and game farming, a single limitation calculation taking into account both the sheep and game livestock would be performed.
A taxpayer that can demonstrate that the cost of acquisition of a particular animal, which is no longer held and not disposed of at the end of the year of assessment, is included in the amount to be carried forward under paragraph 8 (for example, the animal purchased has been hunted and killed) may exclude the cost of that particular animal from the carried-forward amount and immediately claim it as a deduction. It is considered unlikely that this will apply frequently, if at all, in the context of game farming because it is often impracticable to accurately count and track particular livestock.
In addition, a farmer will be entitled to an immediate deduction if the opening stock value of livestock plus the amount to be carried forward under paragraph 8 exceeds the market value of all livestock held and not disposed of at the end of the year of assessment. The amount of the deduction is equal to the amount of the excess and the onus rests on the taxpayer to substantiate the amount claimed. The amount to be carried forward under paragraph 8 must also be reduced by the excess.
Example 1—Application of paragraph 8 limitation to game farmers
Facts:
Farmer A, who is carrying on game-farming operations, submits the following information with his tax return at the end of the year of assessment:
R
Farming income
50 000
Standard value of livestock at the end of the year of assessment:
Game
Nil
Other livestock
300
Value of produce at the end of the year of assessment
2 000
Standard value of livestock at the beginning of the year of assessment:
Game
Nil
Other livestock
279
Value of produce at the beginning of the year of assessment
Nil
* Provided for under paragraph 3 and 4—in the context of game farming this will often be Rnil but it could include, for example, a market value deduction for inherited game livestock.
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