Taxation of Farmers

The intention to farm along with generating profit prospects and the usage of assets are considered to be the requirements for the title of farming income.

Individuals often raise the question as to why taxation of farmers is classified and considered differently to other tax returns. There are many factors that contribute to this statement such as the fact that farming income is referred to as cyclical due to changes which could occur naturally as well as unforeseen circumstances, such as farming being weather dependent.

Farmers are also liable to incentives due to capital allowances. In section 26 of the income tax act there are exceptions that are taken into consideration for farming income such as special capital development expenditure allowances, concessions for forced sales and the tax rate concessions.

Farmers can be granted a residential unit’s allowance at 5% if the taxpayer owns at least five residential units that are new and must be used solely for the purpose of trade.

The last benefit granted to farmers is the “rating formula” which is three separate formula’s which exist to reduce the tax paid by a farmer. The general formula which allows all farming income from current and the previous four years to be added together and divided by five. The plantation formula is used to deduct the cost of establishing or maintaining a plantation and lastly the sugar cane formula, which states sugar cane that is sold due to fire destruction can be excluded.

It must also be noted that other rules and principals still apply for taxation of farmers despite the allowable special deductions that are granted. Farming income must be added to taxable income and must not be ring fenced. Domestic use, removal from the republic and donations redeemed must be stated at Market Value as per section 11A.Sale due to drought or stock disease must be replaced within four years, the option of deduction income in the year replaced can be considered in cases of forced sales of livestock.

Tasha Bridgemohan. (KZN – Senior accounting and taxation team leader)