Page 678 - SAIT Compendium 2016 Volume2

IN 79 Income Tax acT: InTeRPReTaTIon noTes IN 79
The First Schedule applies regardless of whether a taxpayer derives an assessed loss or a taxable income from farming operations. The Schedule may further apply even after farming operations have been discontinued [section 26(2)]. Both section 26 and the First Schedule apply to farming operations conducted by a nursery operator. Some nursery operators have in the past, however, failed to comply with paragraph 2 of the First Schedule to the Act. Paragraph 2 requires a nursery operator carrying on farming operations to include in that operator’s return of income the value of all produce held and not disposed of at the beginning and at the end of each year of assessment.
3. The law
Section 26 and the paragraphs of the First Schedule which are referred to in this Note are reproduced in the Annexure.
4. Application of the law
4.1 Introduction
The First Schedule applies to any person who derives taxable income from carrying on pastoral, agricultural or other farming operations. Such a person can include an individual (whether farming alone or in partnership), a deceased estate, an insolvent estate, a company, a close corporation or a trust. A nursery can consist of any one of the following operations or a combination of them:
• The carrying on of farming operations comprising, among others, the production of seed and the growing of plants, trees or bulbs for sale.
• The carrying on of non-farming activities such as the buying of plants and trees, fertiliser and other trading stock for immediate resale.
A nursery operator conducting both operations will have to split the operations between farming operations and operations other than farming. The expression ‘farming operations’ is not de ned 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.* It has been held that 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. However, in Kluh Investments (Pty) Ltd v C: SARS‡ Rogers J stated the following:
‘Once all the facts relevant to determining whether the case does or does not fall within s 26(1) and para 14 [of the First Schedule] have been ascertained, the question whether on those facts there has been a carrying on of farming operations seems to me to be a question of law.’
Farming and agriculture are de ned in the Merriam-Webster’s dictionary§ as –
‘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’.
However, every activity in the nature of farming will not constitute ‘farming operations’. This was con rmed by Heher AJA in the Supreme Court of Appeal in C: SARS v Smith when he stated the following:¶
‘In ordinary parlance the phrase ‘carrying on farming operations’ is capable of several meanings. In the context of s 26(1) it could mean simply ‘a particular form or kind of activity’ or it could bear a more commercial nuance, ‘a business activity or enterprise’.
‘The Act is directed to the taxation of pro t-making activities. There is no apparent reason why the legislature should have intended a taxpayer who farms as a hobby or who dabbles in farming for his own satisfaction to receive the bene ts conferred by the First Schedule.’
An example of the above principle can be found in ITC 1324** in which it was held that a grower who merely intended to sell crops surplus to his needs was not carrying on farming operations. Thus, in order to fall within the First Schedule a farming operation needs to be a trade of the taxpayer.
It is now settled law that the test for determining whether a taxpayer is carrying on farming operations is a subjective one, that is, one based on the taxpayer’s intention. This was held to be the case in the Smith case above in which Heher JA stated that –††
‘a taxpayer who relies on s 26(1) is (over and above proof that he is engaged in an activity in the nature of farming) only required to show that he possesses at the relevant time a genuine intention to carry on farming operations pro tably. All considerations which bear on that question including the prospect of making a pro t will contribute to the answer, none of itself being decisive’.
The court went on to cite ITC 1185 in which Miller J stated the following:‡‡
‘It is no dif cult matter to say that an important factor is: what was the taxpayer’s intention when he bought the
property? It is often very dif cult, however, to discover what his true intention was. It is necessary to bear in mind in
* E A Kellaway Principles of Legal Interpretation of Statutes, Contracts and Wills (1995) Butterworth’s at 224
† ITC 1319 (1980) 42 SATC 263 (EC) at 264, cited with approval in CIR v D & N Promotions (Pty) Ltd 1995 (2) SA 296 (A), 57 SATC 178 at 183
‡ Case No. A48/2014, Western Cape High Court, 9 September 2014, as yet unreported in [9]. § www.merriam-webster.com/dictionary/agriculture [Accessed 22 September 2014
¶ 2002 (6) SA 621 (SCA), 65 SATC 6 at 9/10.
** (1980) 42 SATC 288 (Z).
†† Above at 65 SATC 13.
‡‡ (1972) 35 SATC 122 (N) at 123/4.
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