Page 679 - SAIT Compendium 2016 Volume2

IN 79 Income Tax acT: InTeRPReTaTIon noTes IN 79
that regard that the ipse dixit* as to his intent and purpose should not lightly be regarded as decisive. It is the function of the court to determine on an objective review of all the relevant facts and circumstances, what the motive, purpose and intention of the taxpayer were . . .
This is not to say that the court will give little or no weight to what the taxpayer says his intention was, as is sometimes contended in argument on behalf of the Secretary in cases of this nature. The taxpayer’s evidence under oath and that of his witnesses, must necessarily be given full consideration and the credibility of the witnesses must be assessed as in any other case which comes before the court. But direct evidence of intent and purpose must be weighed and tested against the probabilities and the inferences normally to be drawn from the established facts.’
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.’
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 that is used to determine whether a person is carrying on farming operations applies to a nursery operator.
4.2 Nursery produce
Section 22 deals with amounts to be taken into account in respect of the value of trading stock and speci cally excludes farming. Under paragraph 2 of the First Schedule a nursery operator’s return of income must include the value of all produce held and not disposed of at the beginning and at the end of each year of assessment.
The value of consumable stores, such as fuel, spare parts, fertilizer and materials for packing, held at the end of the year of assessment for farming purposes, must not be brought to account as trading stock because section 22 excludes a trade of farming. Such amounts will also not be brought to account under paragraph 2 since they do not comprise produce. However, to the extent that such consumable stores are held for non-farming purposes, such as fertiliser acquired for resale, they must be brought to account under section 22. The amount that a farmer may claim as a deduction for consumable stores may, however, be limited under section 23F when the liability for the goods has been incurred but the goods have not been supplied during the year of assessment.
The term ‘produce’ is not de ned in the Act, and therefore, its ordinary dictionary meaning is retained, which is natural or agricultural products as opposed to manufactured goods.§ The general rule is that crops accede to the soil in the same way that permanent buildings or improvements do.¶
Seeds planted can result in crops that are incorporated with the soil by a process of nature, and become one with that from which they draw their nourishment.** This principle is based on the rationale that the owner of the soil, which nourishes the seeds or plants, should become the owner of the eventual product.†† Crops are however not inseparable from the soil since they can be reaped or removed once they have ripened or matured.‡‡ Growing crops are thus part of the land with no separate existence and do not constitute produce until they have been harvested or picked when mature or ripe. For this reason, crops growing at the end of the year of assessment are not required to be brought into account for income tax purposes.
Consequently, the value of growing crops is excluded from opening stock at the beginning of the succeeding year of assessment. Plants grown, which are not yet ready for sale, will fall into this category of growing crops and must not be brought into account as produce.
There are, however, limitations and exceptions to the rule that everything that is planted in the soil becomes part of the soil. Such an exception exists for plants, bulbs, shrubs or trees, which are destined to be removed like those in a nursery as they retain their identity as movables and do not become part of the soil.§§ In Gore NO v Parvatas (Pty) Ltd¶¶ it was
* According to the Glossary of foreign terms by J Silke and Justice MM Corbett which forms part of the South African Tax Cases Reports published online by LexisNexis, the expression ‘ipse dixit’ means ‘ He himself said it; a bare assertion or statement without proof, resting on the authority of the person who made the assertion or statement’.
† (2000) 63 SATC 161 (SEC) at 170
‡ (1991) 55 SATC 26 (C).
§ D M Davis et al Juta’s Income Tax [online] (Juta Law Online Publications: 2004) under South African Income Tax:
Legislation and Commentary / Commentary on Income Tax: / First Schedule / paragraph 2. In R v BHIGJEE 1953 (2) SA 783 (N) at 784 the court held that unlike mealie meal, sugar was not a product of farming operations
¶ Secretary for Lands & another v Jerome 1922 AD 103.
** Secretary for Lands & another v Jerome above at 105. See also Macdonald Ltd v Radin NO & the Potchefstroom Dairies & Industries Co Ltd 1915 AD 454 and Gore NO v Parvatas (Pty) Ltd 1992 (3) SA 363 (C).
†† See Secretary for Lands and Another v Jerome above at 105. See also C G van der Merwe ‘Planting and Sowing’ 27 (First Reissue Volume) LAWSA [online] (My LexisNexis: 31 October 2001) in paragraph 336.
‡‡ Secretary for Lands and Another v Jerome above at 110
§§ Burrows v Mc Evoy 1921 CPD 229. See also C G van der Merwe Sakereg 2 ed (1979) Butterworth’s at page 245/246. ¶¶ 1992 (3) SA 363 (C). See also Burrows v McEvoy 1921 CPD 229 at 235/236 and LAWSA above in paragraph 336.
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