Capital costs are rarely used to reduce taxable profits as they are incurred towards assets or Balance Sheet items.
However, given the pivotal role played by the agricultural sector in the economy, the tax laws grant generous tax concessions to farming capital costs in such a way that they are regarded as normal tax expenses just like salaries. Amazing, right? By the way farming is broader than we think and includes the rearing of crocodiles, game, snakes, bees and dogs. Keep on reading and allow us to enlighten you on how farming can be an important tax planning tool. In this article, words importing the masculine shall be deemed to include the feminine.
Basically, farming generally involves activities of working the ground and growing plants. Farming also involves raising animals for milk or meat. The Income Tax Act simply defines farming as the carrying on of farming operations. However, the said Act goes on to provide that farming operations include ‘the keeping of livestock, the undertaking of agricultural activities and pastoral farming, including the rearing of dairy cattle for milk and dairy products, stud farming, poultry farming, the rearing of sheep for wool or pelts, irrigated agriculture and horticulture.’ As stated above, farming includes the rearing of crocodiles, game, snakes, bees and dogs.
Generally, in determining the taxable income of any person, the income tax Act allows taxpayers to deduct expenditure or losses that are incurred in the production of taxable income, to the extent that such expenses or losses are revenue in nature. In other words, non-agricultural businesses are not permitted to claim the full capital expenditure incurred during a tax year as it has to be spread over the tax life years of the asset.
Contrary to the above practice, the Income tax Act provides a special tax treatment to farmers with regards to capital expenditure. Farmers enjoy generous capital allowances, most of which are claimable in full in the year in which the asset is used. Just for clarity, farmers can claim the full cost of, inter alia, the eradication of noxious plants, contour ridges, dipping tanks, the sinking of boreholes and wells, the construction of structural improvements for the conservation of water including dams, tanks and reservoirs, or irrigation channels or water furrows and the erection of fences, yards & crushes.
Farmers used to enjoy unlimited carry-forward of their tax losses but that was done away with around 2015. However, the tax losses from farming cannot be utilised to reduce taxable profits for any other business run by any taxpayer. In other words, this simply means that the tax losses from farming are ring-fenced such that they can only be used to reduce the taxable profits arising from other farming activities in subsequent tax years. On the other hand, provisions which allowed individual farmers to open past years’ assessments to cater for tax losses incurred in subsequent years were also abolished as they were cited as complicating the taxation of farmers.
In conclusion, capital expenditures stated above can be used to reduce taxable profits for any farmer, as if they are operational costs. Practically, this is done by deducting such costs from the net profits or loss before tax. However, other assets which are not directly linked to farming such as laptops and offices are still eligible for capital allowances.
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