By Koos du Plessis, FISA member, CFP®, FPSA® and Sales Manager: Southern Cape for Sanlam.
Agriculture is a unique industry. It is the industry that ensures food security in the country, the industry that – literally - puts food on the table daily. To contribute to food security in the country, South Africa has specific tax legislation in place, this providing for a special tax dispensation to promote food security.
Section 26 of the Income Tax Act stipulates that a farmer’s taxable income is determined in accordance with the provisions of the Act, subject to the requirements of the First Schedule of the Income Tax Act. Therefore,
Amendments to the Income Tax Act came into effect in March 2016. These amendments incorporated the rules applicable at death (as contained in paragraph 40-41 of the Eighth Schedule: Capital Gains Tax) into the new Section 9HA and the revised Section 25 of the Act.
In short, Section 9HA deals with tax in respect of the disposal of the estate, whereas Section 25 deals with the tax of the deceased estate. Upon death, the individual’s tax is closed and all deductions that may arise are made against the estate up to the date of death. The executor registers a new tax number, in other words the estate in effect gets its own tax number, which means that no claims, losses or expenditure of the deceased may be deducted from the estate.
This Act and its application concern in particular farmers who farm in their own name (the farm, livestock, vehicles and farm implements are registered in their own name). In accordance with the First Schedule of the Income Tax Act, the market value of the livestock is reduced to a standard value, while depreciation applies to farm implements and vehicles. At death, all the farmer’s assets are deemed to have been disposed of at market value.
Prior to March 2016 the difference between market value and standard value was taxed as capital gains at an effective rate of 18%. Section 9HA stipulates that the capital gains tax must be changed to income tax, with a maximum rate of 45% for an individual.
In cases where there are crops on the land, all expenditure is claimed from the individual’s estate, but no current expenditure may be claimed against the tax on the estate. Therefore, the full profit on the crops will be taxable in the estate. Only expenditure incurred by the estate and in the name of the estate may be claimed from the income.
The table below shows the impact the calculation of income tax from March 2016 can have on an estate, compared to capital gains tax prior to March 2016.
In this example it results in a difference of R3,564,141 – cash required additionally to the estate and tax.
CALCULATION OF TRADING STOCK IN ESTATE
|
Assets |
Number |
Book value/Standard value |
Market value |
Subjected |
|
|
|
Dairy cows |
220 |
R 8,800 |
R 2,200,000 |
R 2,191,200 |
|
|
|
Dry cows |
130 |
R 5,200 |
R 1,300,000 |
R 1,294,800 |
|
|
|
Heifers |
81 |
R 2,430 |
R 364,000 |
R 607,500 |
|
|
|
Calves |
73 |
R 2,190 |
R 328,500 |
R 326,310 |
|
|
|
Sheep |
65 |
R 390 |
R 195,000 |
R 194,610 |
|
|
|
Farm implements |
|
R 653,896 |
R 9,240,000 |
R 8,586,104 |
|
|
|
|
|
|
|
R 13,200,524 |
|
|
|
Capital gains tax at 18% prior to March 2016 |
R 2,376,094.32 |
|||||
|
Income tax at 45% after March 2016 |
R 5,940,235.80 |
|||||
Section 9HA does not apply if the farmer’s spouse is the sole heir. In reality, the income tax is deferred only until the surviving spouse dies.
WHAT IS THE ANSWER?
When the Act was implemented, experts in the field consulted with the South African Revenue Service and National Treasury regarding the impact of farming activities that are discontinued upon the death of the farmer, and the threat to food security.
The answer to this was more of a question – why do farmers still farm in “own name”?
This question requires a complex answer that can only be provided with the assistance and knowledge of an expert in this field. The estate and associated tax do not comprise only income tax, but also include estate duty, capital gains tax, value-added tax, etc.
he following benefits apply to those farming within a company:
- The farm operations may qualify as a small business enterprise and therefore only income tax at the lower rates will be payable.
- The company cannot “die”. If the necessary management agreements and business contract are in place, the farming operations can simply continue.
- Shareholding in the company will be an asset in the estate and be subject to capital gains tax, at a lower rate than income tax.
The question every farmer should ask himself is: Can I afford to die? Specialist advice should be sought.
EXCLUSIVE TO FARMINGPORTAL
