Page 680 - SAIT Compendium 2016 Volume2

IN 79 Income Tax acT: InTeRPReTaTIon noTes IN 79
held that bulbs which are planted as bulbs and are to be removed from the soil as such must be distinguished from plants that are grown from seeds which take root and bear crops that are then harvested. Unlike the growing crops the bulbs are destined to be removed and do not form part of the soil. The decisive factor as to whether something becomes movable is the intention of the person who planted it.
The court was satis ed that bulbs planted in the soil with the intention of being removed from it, retained their identity as movables.* The question whether a bulb is produce for tax purposes will depend on the reason for its removal from the soil. Bulbs which are removed from the soil for sale will comprise produce. Bulbs removed from the soil as part of a natural growing cycle, for example, with the intention of replanting them in preparation for the next season, will not comprise produce since they are not ready for sale. The onus is on the nursery operator to distinguish between the two types of bulbs.
A dif culty arises with seedlings and other plant material (including bulbs) produced and grown in containers for ultimate sale in the same containers. SARS accepts that such items will only have a value as produce once they have matured suf ciently to be in a saleable condition. The onus remains on the nursery operator to make that determination on a sound basis.
The related expenditure incurred in getting the plants, trees, seedlings or bulbs to a marketable state should generally be deductible under section 11(a) read with section 23(g) on the basis that it was incurred in the production of income in carrying on a trade.† Examples of such expenditure include labour and fertilizer. Capital development expenditure incurred on items such as irrigation schemes and the erection of farm buildings will qualify for deduction under paragraph 12 provided all the requirements of that provision are met. The proceeds derived from the sale of the plants and bulbs are included in gross income in the year of assessment in which the sale takes place.‡
4.3 Valuation of produce
4.3.1 Valuation method
Paragraph 9 stipulates that the value to be placed on produce included in any return shall be such fair and reasonable value as the Commissioner may x. The fair and reasonable value of the produce xed by the Commissioner is subject to objection and appeal under section 3(4)(c).
A reasonable value is considered to be the lower of production cost or market value. The term ‘market value’ is not de ned for the purposes of the First Schedule but in the context would bear its ordinary meaning of the price which could have been obtained upon a sale of the produce between a willing buyer and a willing seller dealing at arm’s length in an open market.
The value of production costs is determined by considering expenditure allowable for income tax purposes, excluding expenditure deductible under paragraph 12.
In ITC 936§ the Commissioner’s decision to value the appellant’s produce on the cost of production basis was taken on review. The court noted that the cost of production basis was a recognised and proven method of valuation and the Commissioner’s decision to use it could not be said to have been so unreasonable that no reasonable person would have adopted it. Whilst the market value method was open to the Commissioner, the Commissioner was not obliged to use it. The appeal was accordingly dismissed.
The ‘reasonable man’ test does not give preference to one party over the other and both parties are treated on par.¶
4.3.2 Value of closing stock [paragraph 3(1)]
Paragraph 3(1) stipulates that the value of produce held and not disposed of at the end of the year of assessment must be included in income for that year of assessment, and that there shall be allowed as a deduction from this income the value of produce as determined in accordance with paragraph 4, held and not disposed of at the beginning of that year of assessment.
4.3.3 Value of opening stock [paragraph 4]
The value of produce held and not disposed of at the beginning of a year of assessment by a nursery operator who carried on operations on the last day of the year immediately preceding the year of assessment is deemed to be the sum of –
• the value of produce held and not disposed of at the end of the year immediately preceding the year of assessment
[paragraph 4(1)(a)(i)], and
• the market value of the produce –
– acquired during the current year of assessment otherwise than by purchase or natural increase or in the ordinary course of farming operations [paragraph 4(1)(a)(ii)(aa)]; or
– held for purposes other than farming operations, which the nursery operator during the year of assessment commenced to hold for the purpose of farming operations [paragraph 4(1)(a)(ii)(bb)].
A nursery operator who acquires produce by donation, inheritance or distribution in specie must include the market value of that produce in opening stock under paragraph 4(1)(a)(ii)(aa) and in that way will secure a deduction for such produce. For more on the treatment of produce on death see 4.3.6.
* At 670. In this case the court referred to Pothiers Traite de la Communauté where it was said that a nurseryman’s bulbs, once transplanted from the soil where they originally grew, retain the quality of movables which they acquired when they were rst taken out of the soil. They are not considered to be part of the soil because they were planted ‘pour perpétuelle demeure’. See also LAWSA volume 27 in 336.
† See Port Elizabeth Electric Tramway Co Ltd v CIR 1936 CPD 241, 8 SATC 13.
‡ See the de nition of ‘gross income’ in section 1(1).
§ (1960) 24 SATC 361 (C).
¶ Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A) at 435H-I.
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