It’s easy enough to start your own farming business, but what might not be so easy, is jumping through all the hoops that the taxman holds up in front of you.
You might not know how to make the most of your tax journey, or even how to start doing taxes for your own small business. You might even accidentally do something that lands you in deep trouble with SARS.
Food for Mzansi caught up witho two financial managers to get you the best tax tips to grow your farming enterprise. On your behalf, we also asked some of those awkward questions about your tax affairs.
Below you can read everything from setting up your business as a tax paying entity, the importance of expert advice, tax tips and benefits and carbon offsetting, record keeping and tax milestones for your business.
1. Get expert advice
First things first. When it comes to tax matters and dealing with SARS, please get the advice and support of an expert. There are many great tax consultants out there, and SARS also has a free walk-in service at all branches.
“Tax can become very complicated and a good tax consultant is important,” advises Dawie Maree, head of information and marketing at FNB.
This might seem like straightforward advice, but you’d be surprised how few people end up asking for expert advice. They then find themselves struggling when they try to apply broad advice to a very specific situation.
Food For Mzansi’s expert tip: Tax problems cannot be solved around a braai with your neighbour. Of course, unless they are a tax expert.
2. How to register your business for tax
There are a few pivotal moments where you will have to make decisions. This will impact your tax position in future. The first is right at the start of your business. You will decide whether you will operate as a sole proprietor, in partnership or as a private company.
“The way you start will determine how you go forward,” says Bertie Hamman, senior manager of agribusiness at Standard Bank.
“Small farming ventures often operate as a sole proprietorship because there are few legal requirements to set up, therefor also less costs and compliance involved,” says Hamman.
As a sole proprietor, all profits and losses of the business accrue to the farmer owner and as such you don’t need to register your business with SARS. However, all your business income and expenses must be included in your personal tax return.
Because there is not a distinction between yourself and your business, the tax effect of paying yourself a salary is neutral.
According to Hamman, a partnership is like a sole proprietorship, as the business is not a separate tax paying entity. The partners will include their share of the partnership’s profit and loss in their personal income tax return.
“Larger farming ventures often operate in the form of a private company,” says Hamman. “This is because the shareholders want to distinguish between their personal assets and liabilities, and those of the company.”
Due to this distinction, a private company must register as a taxpayer with SARS.
The result is that the salary you pay yourself as an employee of the company will generally be a tax-deductible expense in the hands of the company. This will then be taxable income in your personal income tax return.
“Your specific circumstances will determine if this is a tax efficient way to structure your affairs as it may be that the company tax bracket is lower than your personal tax bracket.”
Record-keeping is a very important part of running your business, as well as part of your tax journey. If your operation is complicated or on large scale, a good accountant is also very important, according to Maree.
Maree also mentions that most commercial farmers are registered for VAT and thus qualify for a diesel rebate (80% rebate on qualified usage).
“But in this case record-keeping is crucial as SARS can audit a farm at any time and then everything must be in place,” says Maree.
“I have engaged with SARS on this issue, along with Corné Louw at Grain SA. You can get good information on diesel rebates from him.”
Food For Mzansi expert tip: Email firstname.lastname@example.org if you want to get the latest information on diesel rebates.
4. Are there specific tax benefits for farmers?
Everybody in Mzansi knows how important farmers are in our day to day lives, so surely there should be some tax incentives or benefits for our farmers?
The short answer is sort-of, as there are regularly benefits for farmers to aid them through times of stress, for example drought relief. But these benefits are made available to farmers when necessary and are not always available.
“Over time a couple of benefits that farmers had have been cancelled,” says Maree.
“But there is still a couple of benefits that farmers have, for example, buying inputs and deducting it from profit at year-end. But that loops back to my first point – get expert advice.”
“There have been times when provision for certain tax concessions were made available to farmers who were forced to sell livestock because of drought conditions,” says Hamman.
“How this will apply to individual farmers can perhaps differ and I recommend that you consult your tax advisor as to the potential relief this may bring.”
Due to the fluctuating realities of tax incentives, it is crucial that you have the expert advice from someone that is keeping an eye on the tax trends, that can advise you on what to do and when.
5. Tax milestones for a new business
There are certain pivotal moments where you may have to specifically consider the tax implications of your decisions.
Hamman says, “When you start your farming venture and decide in what business form you will trade i.e., sole proprietorship, partnership, company, etc. That decision you make at the start is likely to determine your tax regime going forward.”
Also, when you expand your business and must decide if you want to buy another farm or to lease a farm. These decisions will attract different tax assessments.
If you want to expand your farming activities and want to buy another farming property, you may have the choice of funding the purchase by either introducing more share capital, or a shareholder loan, or issuing of preference shares or a bank loan.
I’m sure you can guess what Hamman and Maree say to this?
“Get expert advice.”
6. In what ways can you minimise the tax you have to pay as a small business?
Any taxpayer will pay tax on their taxable income. In order to reduce your tax liability, you must reduce your taxable income, according to Hamman.
When you do your tax calculation, you include your income and expenditure in the year in which this is received or paid. Hamman walks us through this process:
“The first step to calculate your taxable income, is to determine your gross farming income. Depending on which branch of farming you are in, slightly different calculations apply, and I would advise you to consult your tax advisor as to the actual calculation applicable to you.”
After calculating your gross farming income, you may be eligible to deduct the following categories of direct expenditure which you incurred in generating taxable income on your farm:
- Rent you may have paid, for example if you were renting the farm.
- Interest you paid on loans associated with your farming activities.
- Rates & taxes you paid, and which is also directly related to your farming activities.
- The cost of seed and fertiliser.
- Cash wages paid to your farm employees.
- Cost of rations purchased for farm workers.
- Expenses related to fuel, oil and grease, repairs and maintenance, insurances and licenses and possible wear and tear allowances.
This list is not exhaustive, so do not rely on it and forego speaking to an expert tax advisor.
You can perhaps also qualify for the deduction of all or part of the following capital type expenditure:
- Expenditure of developments and improvements such as on dipping tanks and boreholes
- Expenditure related to fences and farm buildings which include housing for farm employees
7. Tax dangers
There is a difference between wanting to get the most from your tax and committing tax fraud. This is the distinction between tax avoidance and tax evasion, and you should tread lightly here.
In general terms, tax avoidance refers to the legal application of sections in the income tax act to your advantage in order to reduce your tax liability, according to Hamman.
For example, this can be done by making optimal use of permissible deductions or by changing your business structure and making sure to fully disclose these in your tax return.
“In contrast, tax evasion refers to illegal means by, for example, deliberately misrepresenting your tax affairs to SARS. For example, by under-declaring income,” says Hamman.
There are certain things you can do as a small business owner to protect yourself from paying unnecessary taxes, but it still has to make fiscal sense, and be legal.
For instance, estate planning is crucial to avoid paying excessive tax (e.g. estate tax and/or capital gains tax) when someone passes away, according to Maree. But, again, experts should advise farmers, especially new commercial farmers.
8. Don’t let tax decide everything you do in your business.
When you make too many decisions based on the tax incentives, you might not be making the best decisions for your business.
“People might make decisions based on the tax incentive rather than the commercial realities they are in,” says Hamman. “Don’t emphasise the tax consequences.”
Tax incentives can also be yearly, so you might make decisions that make sense due to tax incentives this year, but next year you are stuck with those decisions and might not have the same tax incentives.
“When one needs to pay tax, please do so,” emphasises Maree. “Do not try to avoid tax, the fines and/or sentences are not worth it.”
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