Student name Tony Nhlawuleko Sithole

Student number 202101821

Name of campus Braamfontein

Year of study 2023 Semester 2

Programme BCOM Accounting

Module Taxation 3B Module code: Tax320

Name
Lecturer Mr Temptation Jaravani
Due date

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 DECLARATION BY STUDENT I, the undersigned declare that:

• I have retained a copy of this assessment.

• I understand what plagiarism is and are aware of the Damelin’s policy in this regard.

• The work hereby submitted is my original work, gathered and utilised to fulfil the
requirements of this assignment except for source material explicitly acknowledged.

• I have not used work previously produced by another student or any other persons to
hand in as my own.

• I have not allowed and will not allow anyone to copy my work with the intention of
passing it off as their own work.

Signature of Student: Tony Sithole Date: 11 August 2023

Table of Contents
Introduction ............................................................................................................................................ 3
Question 1 ........................................................................................................................................... 4
Question 2…………………………………………………………………………………………………………………………….5-7
Question 3 .................................................................................................................................. 8
Conclusion .............................................................................................................................. 9

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Introduction

The farming sector plays a huge role in strengthening the country’s GDP. In a farming
situation, a barter transaction may occur when a farmer trades livestock or produce
for another item which is not cash. In this assignment we are going to discuss amounts
to be included in taxable income with regards to farming operations. Then later on, we
are going to discuss the treatment of a farmer’s trading stock for the purposes of the
First Schedule. Lastly, we are going to discuss the application of the provisions of the
Eighth Schedule section 8(4)(a) with regards to capital assets becoming trading stock.

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Question 1

The amount to be included in Farmer A’s taxable income would be the market value of
the land received in the barter transaction. In this case, the market value of the 50
acres of land was 3 million. Since the wine received in the transaction was intended
for resale, it would not be considered as taxable income for farmer A. Therefore, the
amount to be included in Farmer A’s taxable income would be R 3 million.

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Question 2

Treatment of farmer’s trading stock for purposes of the First Schedule.

A farmer’s trade mainly includes growing, breeding or buying and selling livestock or
produce. Therefore, the farmer can perform activities relating to animal farming or crop
farming. Included in Animal farming are activities such as dairy farming, poultry
farming, horse breeding, fish farming, game farming and beekeeping. Crop farming
involves the planting and harvesting of produce like cut flowers, fruit and vegetables,
tobacco, sugar cane, nuts and grain. Planting and harvesting products like cut flowers,
fruit, vegetables, tobacco, sugar cane, nuts, and grain are all part of crop farming.

Animal farming and crop farming give rise to the farmers trading stock. Livestock and
produce are other terms for a farmer's trading stock. The value of any livestock or
produce that a farmer holds but does not sell must be reported in the income tax return
at the beginning and end of each year of assessment. This involves the trading
stock of farmers who belong to a cooperative and combine their livestock or produce
with that of other farmers, such as sugarcane pools or the pooling of grapes to make
wine. The farmer should only include livestock and produce in opening and closing
stock.

However, the accounting of consumable stores is not required by the First Schedule.
Therefore, a farmer’s consumable stores, for example fuel and spares used for farming
equipment, and non-livestock or non-produce items still on hand at the end of the year
does not have to be taken into account for the purposes of the First Schedule.

The Actual increases of livestock will form part of the closing stock of a farmer.
Additionally, any decrease in livestock resulting from death will not be included in the
figure of livestock on hand and not disposed of at the end of the year of assessment.

Sometimes some conditions may arise in which various operations combine into other
farming operations. For example, the breeding of horses is considered as being a
farming operation. The horse breeder may also use the horses in horse racing to earn
a profit. In this situation, just the horse breeding activity will be considered a farming
business, and hence the First Schedule applies only to the agricultural operation. The
normal tax rules will apply to the receipts generated from the horse racing.

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The first schedule states that even the fractional ownership of pooled resources is to
be included in produce on hand and not disposed of. Additionally, a farmer has to
include in produce held and not disposed of the value of produce purchased for
farming purposes, whether it was acquired for purposes of selling together with the
farmer’s own crop or to use for feeding livestock.

According to paragraph 6 and 7, Any opening stock that remains on hand at the end
of the fiscal year must be included in the closing stock at its standard value rather than
market value. Standard values pertaining to livestock are set by regulation. However,
the regulations do not fix a standard value for game livestock. For standard values,
the Commissioner allows game livestock to be allocated a standard value of nil. If
there is no value for a particular type of livestock, a value must be agreed upon with
SARS. If no value is assigned to a specific type of livestock, a value must be agreed
upon with SARS.

A farmer may use a value other than the standard value prescribed by the regulation,
but such value cannot be more than 20% higher or lower than the standard value set
by the regulations. Furthermore, once the farmer uses a specific standard value, It will
be binding on all subsequent returns filed by the farmer and cannot be changed or
modified.

If a farmer classifies livestock in a way other than that prescribed in the regulation, the
Commissioner may authorize a standard value for the class in which the farmer
classifies the livestock. In these cases, the Commissioner must take into account the
values outlined in the regulation.

All trading stock that is held and not disposed of at the end of a year of assessment is
normally referred to as closing stock and all trading stock that is at hand at the
beginning of a year of assessment is referred to as opening stock. Furthermore, the
closing stock in the prior year of assessment becomes the opening stock in the present
year of assessment. Generally, the Farmer’s trading stock is accounted for in the First
Schedule.

According to paragraph 3(1), At the end of the assessment year, the farmer must
include in income the value of any trading stock kept but not disposed. The standard
value will be used to allocate a value to the livestock. Breeding stock which is held and
not disposed of by the farmer is also included. The value of produce that is held but

pg. 6
not disposed of should be fair and reasonable. A reasonable value is measured to be
the lower of production cost or market value.

All the relevant factors must be taken into consideration when determining a fair and
reasonable value. The valuation is dependent to objection and appeal. According to
paragraph 3(2), In the case a farmer fully or partly stops farming operations during a
year of assessment, the value of trading stock must be added in the farmer’s income
for as long as the stock is still kept and not sold. Income tax and CGT are subject to
special rules upon the death or sequestration of a farmer and the allocation of trading
stock, livestock or produce among spouses.

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Question 3

Tax cost of machine: 100 000

Less capital allowances claimed: (40 000)

Tax value/ base cost: 60 000

Recoupment

Deemed proceeds [section 8(4)(k)] 120 000

Less tax value: (60 000)

Profit on disposal of machine: 60 000

• The profit on disposal of the machine of 60 000 comprises a recoupment of

capital allowances of 40 000 under section 8(4)(k)(iv) and a capital gain of
20 000. The recoupment is limited to the capital allowances claimed as a
deduction of 40 000.

CGT

Deemed consideration [paragraph 12(1)] : 120 000

Less: Recoupment under section [8(4)(k)(iv)] (40 000)

Proceeds under paragraph 35. 80 000

Less: Base cost : (60 000)

Capital gain : 20 000

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Conclusion

In summary, Farming can be a very profitable and lucrative business in South Africa,
however fluctuations in taxable income are common from year to year. In this
assignment it was found that Income from barter transactions is also included in the
taxable income from farming operations except if it is of a capital nature in which
instance CGT may apply. Furthermore, it was found that the farmer’s trading stock is
subject to rules set by the first schedule. Lastly, we discussed provisions of the Eighth
Schedule section 8(4)(a) with regards to capital assets.

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