Put the tax burden in its place

February 2024

PIETMAN BOTHA,  INDEPENDENT AGRI- CULTURAL CONSULTANT

To farm profitably is not a given due to the climate, changes in the input and output prices as well as many other factors that can go wrong. The receiver of revenue understands this and there are many legal methods of rolling taxes to the future.

To pay tax when all legal deductions were made, is a privilege – especially if you are a farmer, because this means that you have made a good profit.

Any farmer will implement strategies to lower the production cost. For example, changes to the cultivation practices can lower the diesel needed to plant, but farmers must also use other strategies to lower the tax burden on the business. There are many legal ways to do it, but the farmer in conjunction with his auditor must identify strategies within the law guidelines to pay less tax. 

It is important to calculate what your expected profit and the payable tax will be. This is done by subtracting the expenditure for the whole financial year from the income received for the whole financial year. The expected depreciation from capital items such as tractors must also be deducted to calculate the profit or loss. These calculations must be done at least two months before the end of the financial year so that there is still time to implement these strategies.

Farmers can cause problems for themselves with indiscriminate purchases, so make use of specialists to help with the decision of what to buy.

MANAGE THE TAX BURDEN 
Take the cashflow into consideration when deciding what to do to decrease the tax burden. If the cashflow is tight, make sure the plan takes this into consideration. 

A farmer has many options to manage the tax burden. The first option will be to pay the tax. The second option will be to buy capital items such as tractors and to write off the depreciation. Farmers can actively grow their businesses to cancel the tax. This will mean that more inputs are needed, but it will then lead to more tax the following year. Alternative strategies will be to buy inputs, grain and marketable livestock. 

Determine what is the most logical option, as there is no standard option that will suit everybody. When the cashflow is a problem, the buying of grain and livestock can be a suitable option because it can be sold the following year to help with the cashflow. Just remember, with cattle there must be feed available.

If your farm is stocked to its capacity, rethink your strategy. Remember that the Receiver of Revenue will always take an in-depth look at your business and in some cases, it can exclude some of these transactions and then you must still pay the tax. 

When inputs are bought, the cash will be locked up in the inputs and it can then take up to 18 months to free this capital. Remember that you need to store the inputs and that it can be the wrong choice, so make sure which inputs you are going to buy. 

If you are growing your farming enterprise every year, it can be a relatively good strategy. However, remember that growing the business is associated with other problems such as management, extra capital needed and extra equipment. 

To buy capital items to manage the tax burden, can only help in a certain extent. According to the 50:30:20 depreciation rule, only 50% of the capital item bought can be deducted as depreciation in the first year. This means that you will spend the capital, but will not get the total benefit to help reduce the tax burden.

All strategies have a negative side, so discuss the tax problem with your auditor and together select an option that will fit your business.

Publication: February 2024

Section: Pula/Imvula