Page 608 - SAIT Compendium 2016 Volume2

IN 69 Income Tax acT: InTeRPReTaTIon noTes IN 69
‘It seems to me that it is possible to extract from these judgments a number of guiding rules. One must give to the phrase ‘a wide and comprehensive meaning’ but not as wide and comprehensive as to embrace a remote and indirect connection. There must be something in the nature of a direct connection and this must be subservient and ancillary to the particular business under consideration.’
The direct connection to game-farming operations is important. Expenditure incurred on facilities like slaughter rooms, meat rooms, cooling rooms, biltong rooms, skin rooms and trophy rooms will generally have the required connection in order to qualify for deduction under paragraph 12.
In contrast, expenditure incurred on facilities used to accommodate visitors and hunters will not have the required connection and will not qualify for a deduction by a game farmer under paragraph 12. Similarly, the cost of buildings erected in connection with a canning or other industry run in conjunction with the farming operations will not be deductible under paragraph 12.
Expenditure on the construction of roads and bridges will also only qualify as a deduction for a person carrying on game-farming operations if they are used in connection with the farming operations.
The deduction available for capital development expenditure (excluding expenditure incurred on the eradication of noxious plants and alien invasive vegetation or the prevention of soil erosion) is ring-fenced. The deduction available in a particular year of assessment is limited to taxable income from farming before claiming the deduction. *
The excess is carried forward and is deemed to have been incurred in the following year of assessment. †
Under paragraph 20A of the Eighth Schedule a farmer who ceases to carry on farming operations and who subsequently disposes of the immovable property on which they were carried on, can, subject to the limitations speci ed in that paragraph, elect to treat any un-deducted balance of capital development expenditure as expenditure incurred and paid in respect of the immovable property. In this way the un-deducted balance of capital development expenditure may form part of the base cost of the farm property for CGT purposes.
The development expenditure under paragraph 12 (1) is not subject to recoupment under section 8 (4) (a) because that section, with some exceptions, only applies to the deductions under sections 11 to 20. Paragraph 12 (1B) and (1C) contain special recoupment provisions for paragraph 12 assets that become movable assets.
4.6 Housing for guests and employees
Expenditure incurred on residential facilities such as bedrooms, dining rooms, sitting rooms and kitchen facilities that are made available to safari guests and hunters, is not incurred directly in connection with farming operations and therefore does not qualify for deduction under the First Schedule (see 4.5). Such buildings may qualify for an allowance under section 13bis if the taxpayer is carrying on the trade of ‘hotel keeper’ as de ned in section 1 (1). In order to qualify as a hotel keeper the taxpayer would have to supply meals and sleeping accommodation.
Before 21 October 2008, the First Schedule provided for a person carrying on farming operations to deduct the expenditure incurred on the erection of dwellings for the person’s farm employees. This deduction is no longer available under the First Schedule or under the main body of the Act. A deduction is, however, available under section 13sept for the sale of low-cost residential units on loan account to employees.
4.7 Cessation of farming operations
Farming operations can be discontinued for various reasons such as voluntary cessation, death or sequestration of the taxpayer. The cessation of farming operations has tax implications for the taxpayer. The treatment of livestock under these circumstances is considered below.
4.7.1 Voluntary cessation of farming operations
A taxpayer who discontinues farming operations can decide to either dispose of all livestock or to retain all or some of the livestock. The proceeds received from the disposal of the livestock during that process (that is, the discontinuance of farming operations) will form part of the taxable income derived from the farming operations.
The position of a taxpayer who discontinues farming operations, but retains livestock or has entered into a ‘sheep lease’ or similar agreement is governed by section 26 (2). This section provides that certain provisions of the First Schedule will remain applicable until all such livestock retained has been disposed of.
Section 26 (2) applies to livestock that has been taken into account and for which expenditure has previously been allowed as a deduction under the Act in the determination of the taxable income derived from farming operations. It therefore applies to game livestock of a farmer since the cost of the game would have been claimed under section 11 (a) and the livestock would have been included in opening and closing stock albeit at a standard value of nil.
4.7.2 Death
The death of a game farmer has income tax and capital gains tax consequences for the deceased person, the deceased estate and the heirs or legatees. These consequences are brie y discussed below with reference to livestock.
(a) Income tax
Deceased person
The taxable income of a person upon death must be determined for the period from the beginning of the year of assessment to the date of death.
As discussed in 4.3.2 a person carrying on game-farming operations includes the value of game livestock held and not disposed of at the beginning and end of the year of assessment in opening and closing stock at a standard value of nil. The same principle applies to the nal year of assessment of the deceased person with the result that game livestock will be re ected at a nil value in opening and closing stock in that year.
* Technically the deduction is claimed and the excess above taxable income from farming is added back to taxable income.
† Paragraph 12(3).
600 saIT comPendIum oF Tax LegIsLaTIon VoLume 2