Cash, Cows and Tax

In times of drought, farmers face tough financial and emotional burdens. Many farmers, and some practitioners, are unaware of tax relief options offered by the Income Tax Act.
Many South African farmers are suffering due to the effects of the severe drought that recently hit South Africa. Although fellow South Africans are trying to help farmers reduce the drought’s side effects, the taxman is not so sympathetic should the farmer not follow the correct procedures.
More often than not, livestock farmers pay more tax in a year that is hit by a severe drought than in a year with an above average rainfall. The reason for this is that, in a dry year, grazing pastures are limited, which leaves farmers with no other option than to sell a portion of their livestock. Should the rain not arrive early enough to provide sufficient grazing before the end of his tax year, farmers will be unable to purchase replacement livestock.
Triple blow: Tax, loss of income and emotional stress
The effect of this is that there is a larger than normal revenue from livestock sales with no matching expenses to reduce the profits. This means that income tax will be payable on this excess income at an extremely high rate.
Over and above taxes, farmers suffer other losses as well, such as the excess expenditure on silage in a dry year.
Usually most of the farmers in the drought-afflicted area will face the same problems, which leads to a collective selling of stock which, in turn, leads to an over-supply (with a small demand) forcing prices downwards.
Good farming practices would include allowing breeding cattle to raise calves, but due to the lack of grazing pastures, farmers have to contradict these good farming practices and sell the cows which are meant to be used for breeding purposes. This means that the farmer will only get a fraction (75% if they are lucky) of the normal meat prices when selling to butchers.
When it starts to rain, drought-affected farmers will start buying livestock, which increases demand (at a lower supply) forcing prices upwards.
One thing that most city folk do not realise is that farmers undergo immense emotional stress when having to witness dying livestock due to hunger and/or thirst. Most farmers invest a lot of time and money into breeding stock. So, to sell this stock at a lower price, leaving little or no return on investment, is almost heart breaking. This leaves farmers with permanent emotional injury.
Tax relief
After speaking to several farmers, it became apparent that a number of them are unaware of the relief offered by the Income Tax Act when a farmer is forced to sell livestock due to drought.
The details of this relief are found in Paragraphs 13 and 13A of the First Schedule to the Income Tax Act.
Paragraph 13: Reopen tax assessment
If a farmer is forced to sell livestock due to drought or stock disease and purchases replacement livestock within four years of the tax year in which the livestock was originally sold, a request can be issued to SARS to reopen the assessment for the year of the forced sale. The purchased cost of the replacement livestock can be claimed as a deduction against the forced sale income.
If the farmer does not wish to make use of this relief, and if it is more advantageous to the farmer, the purchase cost of the replacement livestock can be claimed in the actual year of purchase and can be taxed in the normal manner.
It is important to keep in mind the benefits of equalised rates of tax in terms of Paragraph 19. It may be to the farmer’s benefit to use the benefit of the equalisation rates instead of making use of the relief. There are a number of aspects to take note of, namely the following:

  • A claim under this paragraph needs to be made within five years. It is important to ensure that if replacement stock is purchased within four years, SARS is required to reopen the original assessment within the next year.

  • Full details of the livestock sold under the circumstances must be furnished to SARS in the tax return in the year of assessment that the livestock was sold. If there is no space on the return to furnish the details, a letter should be sent to SARS with all the details. (Be sure to request acknowledgement of receipt). The letter can also be supplied during the verification of the income tax return, which occurs more frequently due to SARS tightening up their procedures.

  • The replacement livestock should be of the same category as those that the farmer was compelled to sell. Replacement livestock is not limited to the same breed, but apparently, it should be of the same gender. In other words, farmers cannot replace cows with oxen.

  • The maximum amount which may be deducted is limited to the purchase price of an equal number of livestock of the same category as those sold. This may, therefore, exceed the selling price.

Paragraph 13A: Investment at Land Bank
An alternative relief would be to invest all or part of the farmer’s proceeds from the sale of livestock due to drought with Land Bank. In this case, the farmer will only be taxed on these proceeds once the money is withdrawn again. There are a number of points to consider:

  • This investment should be done at the earlier end of the tax year or within three months after the transaction took place.

  • The farmer must inform SARS in writing of the intention to have the proceeds or part of the proceeds dealt with in terms of this provision.

  • The certificate from Land Bank, which serves as proof of the investment, must be submitted to SARS. Farmers are expected to sign a declaration on this certificate and have it attested that the investment proceeds were generated from the forced sale of livestock due to drought.

  • The above proceeds will be taxed in the year of disposal if the amount is withdrawn within six months after the year of disposal. If it is withdrawn after six months, but within six years of the year of assessment in which the disposal took place, it will form part of the gross income in the year of withdrawal. 

Conditions applicable to both Paragraphs 13 and 13A
There are some conditions that are applicable to qualify for both Paragraphs 13 and 13A. One
condition is that a double deduction is not allowed.
Another condition is that the sale of livestock must be as a result of drought. As far as could be established, it is unnecessary for the area in which the farming operations took place be declared a drought-stricken area. This is because of the fact that although it could be raining on one farm, it might not be the case on a neighbouring farm. It is suggested that a farmer build up a portfolio of evidence as proof to SARS that livestock was sold on account of a drought and not for other reasons. Photos and/or a letter from the Agriculture Extension Officer would suffice.
Challenges with relief measures
There are a few challenges which present themselves with these two relief measures.
In the case of Paragraph 13 (reopening an assessment), the taxes must still be paid. If the purchases are made before the tax return is submitted for the previous year, it is not a problem because the amount can just be claimed in that tax return.
If the taxable income is over R1 million, a penalty will be payable if the tax is not estimated and paid before the end of the year of assessment as provisional tax.
“Farmers should – through organised agriculture and by means of the media – be advised of the relief measures that exist.”
Although the tax will be refunded by SARS when the assessment is reopened, the money will lie at SARS, without earning interest, for up to four years.
In the case of Paragraph 13A, farmers who do not want their money tied down for at least six months have no choice. In some cases, the money needs to be with Land Bank for 15 months to qualify for the relief. In a situation where it rains and the pastures are ready, farmers would want to gain access to the money to buy replacement stock as soon as possible to try repair as much of the damage done to the farming operations as possible.
What more can be done from a tax perspective to assist farmers?
There are a number of steps that SARS could take which would assist farmers, namely the following:

  • Provide clear guidelines as to what evidence will be accepted as proof that the sales were made on account of a drought.

  • Provide assurance that they will not impose penalties on the underpayment of provisional tax where that tax arises as a result of a forced sale.

  • Pay interest to the farmer from the first day that the payment was made to SARS if the total tax is payable before year-end. Currently, SARS only starts paying interest on credit six to seven months after year-end.

  • Relax the requirement that the money should be invested at Land Bank for six months.

Farmers should – through organised agriculture and by means of the media – be advised of the relief measures that exist. The conditions under which they will qualify should also be explained to them.
Click here to see article in Tax Talk