A Farmer’s Weekly reader and his wife recently purchased a smallholding just outside of Pretoria and intend retiring there. They will live permanently on the property and establish a guest farm. They would also like to sell fresh produce from the farm.
READ:Why simplicity is the ultimate sophistication
This will not be their only income – they will draw a monthly pension and money from other interests. They have several financial queries, the most important of which are the following: what will they be paying tax on, and do they need to register a business? The property is not a going concern at present.
Firstly, the improvements that will be necessary to bring the holding up to full production will be capital sums and cannot be claimed against tax, but the money spent can be used to bolster the base cost for the future sale of the smallholding. If the improvements fall under the first schedule to the Income Tax Act, they could in fact be utilised to begin registering an assessed loss.
However, being on a smallholding and not involved full time means that it may be difficult to offset losses against personal income. Section 20A of the Income Tax Act regulates the position with respect to assessed losses. Once the couple is on the smallholding full time, the picture will change. Losses (if there are any) in a tax year will be allowable against personal income. So one option would be to farm in their personal names.
However, it might be much better for the couple to register a small business corporation or micro business. The choice between the two will be dictated by the potential turnover. A turnover of less than R1 million per annum would suit a micro business, which could be the couple operating as a partnership or a separate enterprise such as a private company.
If the turnover is higher, a small business corporation might be the answer, as the turnover can increase to a whopping R20 million. The other alternative is simply to operate as a private company, with a corporate tax rate of 22%.
Differences in deductions
Any expense for the running of the business, such as seeds, fertiliser, diesel or vehicle spares, can be deducted. Capital expenses such as tractors, ploughs, building alterations, sheds and the like can be deducted over time or written off annually. In a micro business, the turnover is taxed, so the niceties of capital expenses vs revenue expenses would not matter. In a small business corporation, normal accounting principles and regular tax theory would apply.
Capital Expenses and planning for tax
Once the planning is under way and the couple know what work will be done, the tax effects can be planned for.
Farming capital expenses are subject to special rules. Some capital expenditure, such as eradication of noxious weeds and invasive alien vegetation, is allowable against other income, while other capital expenditure must be carried forward to be offset against farming income only. This includes the building of roads, bridges, irrigation schemes and other infrastructure.
This article was originally published in the 25 September 2015 issue of Farmer’s Weekly.
