In Dr A v The Commissioner for SARS, heard recently in the Western Cape High Court, the judge delivered a particularly lucid judgement on the taxation of wine-making. A producer had delivered his entire stock of grapes to his co-op shortly before the end of the financial year, to be processed in terms of the existing agreement between the producers and the co-op.
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On the day of receipt, the co-op, as was its practice, crushed the grapes and mixed this with the crush of other co-op members. The chartered accountant who filed the tax return for the year in question recorded that there was no produce ‘held and not disposed of’ in the hands of the taxpayer (producer).
SARS took a different view and the producer had to pay tax to the value of almost R800 000, an amount far higher than for any closing stock of the past.
It should be noted that farmers are taxed in terms of the general provisions of the Income Tax Act, but are subject to the provisions of the First Schedule. Paragraphs 2, 3(1) and 9 provide that produce or livestock held and not disposed of must be included in the tax return for the year and that there will be a corresponding deduction in respect of stock held and not disposed of at the beginning of a year of assessment. Furthermore, the value to be placed on such produce by SARS has to be fair and reasonable.
Not disposed of yet
The producer objected and the matter was eventually heard in the Western Cape Tax Court. The producer argued that the produce was not ‘held’ as it had been sent to the co-op, but if the court found that it had been ‘held’, then the value placed thereon by SARS was not fair and reasonable.
The judge found that the fact that the grapes had been sent to the co-op, and mixed with other crushes did not mean that the producer had disposed of the produce. He still owned it in the sense that a portion of the mixed crushes was attributable to the producer, who had a right thereto.
The judge referred to two cases, one of which held that wine farming consists of a number of operations from cultivation until delivery of finished product to the ‘first buyer’. The other held that employees of a dairy engaged primarily in the delivery of milk to customers were involved in ‘farming operations’.
Tax too high
Based on these precedents, the Court found that making wine is part of the activity of wine farming. Crushed and pressed grapes are therefore still logically part of the farming operation.
A co-op member in this situation does not transfer ownership to the co-op. The co-op acts as an agent for the member. Thus the producer did not have to have physical possession of the stock for that stock to be ‘produce held and not disposed of’ at year-end. It was sufficient for the purposes of the statute that he had a right to a commensurate portion of the pressed grapes delivered to the co-op.
However, the judge also found SARS’s estimation of the value of the stock was too high and ordered a re-assessment.
