Page 681 - SAIT Compendium 2016 Volume2

IN 79 Income Tax acT: InTeRPReTaTIon noTes IN 79
4.3.4 Discontinuation of farming operations
Under section 26(2) some provisions of the First Schedule will continue to apply to a nursery operator who still holds produce after farming operations have ceased. These provisions will continue to apply until the last of the produce has been disposed of. Paragraph 3(3) deems produce subject to a similar agreement to a ‘sheep lease’ to be held and not disposed of by the grantor of the lease or agreement (lessor). The value of the produce must be included in the determination of the lessor’s taxable income each year until the produce is disposed of.
4.3.5 Commencement or recommencement of farming operations
The value of the opening stock of produce at the commencement or recommencement of farming operations by a nursery operator is deemed to be the sum of –
• the value of any produce held and not disposed of at the end of the day immediately preceding the date of the
commencement or recommencement of those operations [paragraph 4(1)(b)(i)], and
• the market value of the produce [other than produce referred to in paragraph 4(1)(b)(i)] –
– 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)(b)(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)(b)(ii)(bb)].
The value (lower of production cost and market value) of produce held at the date of commencement or recommencement of farming operations will accordingly be allowed as a deduction in that year of assessment.
Produce acquired by a nursery operator by donation, inheritance or distribution in specie during the current year of assessment must be included in opening stock at market value. For more on produce acquired by a deceased estate see 4.3.6.
4.3.6 Death
The death of an individual who carries on nursery operations 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 produce.
(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 earlier, a person carrying on nursery operations includes the value of produce held and not disposed of at the beginning and end of the year of assessment in opening and closing stock generally at the lower of production cost and market value. The same principle applies to the nal year of assessment of the deceased person with the result that produce will be re ected at the lower of production cost and market value in opening and closing stock in that year.
Deceased estate
An executor of a deceased estate who continues to carry on farming operations must include the market value* of produce acquired from the deceased person in opening stock in the deceased estate’s tax computation.†
Any produce still on hand at the end of the deceased estate’s rst year of assessment will be included in closing stock at the lower of production cost and market value, and the same applies to amounts to be included in opening and closing stock in subsequent years of assessment of the deceased estate. On inclusions in the gross income of the estate and deductions claimable by the estate, see ‘Heirs and legatees’ below.
Heirs or legatees
Any amount received by or accrued to the deceased estate from the disposal of produce must be included in the gross income of the deceased estate unless it is derived for the immediate or future bene t of an ascertained heir or legatee, in which case it must be included in the gross income of that heir or legatee [section 25(1)].
Deductions or allowances relating to nursery operations conducted by the executor must be claimed by the deceased estate unless they relate to income which has been included in the income of an ascertained heir or legatee under section 25(1). In the latter event the deductions or allowances must be claimed by the heir or legatee [section 25(2)]. For example, an ascertained heir or legatee would claim the market value of produce acquired by the estate on the date of death.
The amount received by or accrued to an heir or legatee who disposes of produce acquired by inheritance will be of a capital nature provided that it was not made part of a farming operation (see ‘Capital gains tax’ below).
By contrast, any amount received by or accrued to a farmer on disposal of inherited produce which has been incorporated into the farmer’s farming operations must be included in the farmer’s gross income. Under paragraph 4(1) (a)(ii)(aa) the farmer will be entitled to an opening stock deduction for the inherited produce equal to its market value. Any inherited produce not disposed of in the year of assessment in which it was acquired must be included in closing stock at the lower of production cost or market value.
(b) Capital gains tax
For more information on the capital gains tax consequences of deceased estates, see chapter 16 of the Comprehensive Guide to Capital Gains Tax (Issue 4).
* Determined at the date of death of the deceased. † Paragraph 4(1)(b)(ii)(aa).
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