The relevancy of livestock standard values for tax purposes

Marese Lombard CA(SA) Lecturer in Taxation Centre for Accounting University of the Free State

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Most farmers are unaware of the fact that each year they have to include the value of their livestock in their income tax returns.  This value should be shown at standard value (which is the value according to SARS), rather than the market value.

The standard values are supposed to be a reflection of the realistic value of the different animals, and therefore one would assume that these values will be adjusted on an annual basis. The reality is that these values have not been adjusted for quite some time, with the effect that we now have standard values that are very unrealistic and do not reflect the true value of the animals.

Farmers are concerned that this will put them in a worse off position in terms of their tax liability than if the animals were included at market value.

To illustrate, the following is a comparison between the standard value of livestock and the average market values for the 2014 year of assessment:

Cattle:

Standard value according        Approximate market value 2014

to SARS                                     

Bulls…………………………………….. 50  Bulls………………………………… 15 000

Oxen……………………………………. 40  Oxen………………………………… 7 000

Cows……………………………………. 40 Cows………………………………… 8 000

(These approximate values may vary depending on breeding value)

 

As can be seen from the material difference in the standard value compared to the market value, one can comprehend why farmers are concerned about this.

The argument of some is that the effect is minimal seeing as the opening and closing stock is just an ‘accounting journal’ and will not have a material influence on a farmer’s tax liability.  When calculating taxable income of a farmer, the opening livestock should be deducted from the taxable income whereas the closing stock should be added.  Due to the fact that there is such a material difference between the standard value compared to the market value, one must assume that there must be an implication when calculating the tax liability of a farmer.

The calculation of the taxable income can be illustrated using the following example:

A cattle farmer has the following livestock on hand:

Livestock on hand 1 March 2014 28 February 2015
Bulls 7 7
Cows 350 330

 

To calculate the taxable income (simplified example) using standard values, the following is applicable:

(Assume that no other deductions or expenses were allowed)

Farming income for the year……………………………………………………………………………. 2 500 000

Add:  Closing stock @ standard values((7 x 50) + (330 x 40))………..…………………13 550

Less:  Opening stock @ standard values((7 x 50) + (350 x 40))……….………………(14 350)

Taxable income….……………………………………………………………………………………………….2 499 200

If the market values were used, the calculation would look as follows:

Farming income for the year…………………………………………………………………………….. 2 500 000

Add:  Closing stock @ standard values ((7 x 15 000) + (330 x 8 000))………… 2 745 000

Less:  Opening stock @ standard values ((7 x 15 000) + (350 x 8 000))………(2 905 000)

Taxable income…………………………………………………………………………………………..……..2 340 000

 

If we use the difference in these two taxable income amounts and multiply it by the lowest tax rate of 18%, the influence is R28 656 ((2 499 200 – 2 340 000) x 18%).

The implication of this is that if more relevant values were used for livestock, the farmer would have been able to save approximately R28 000 in tax.

The standard values of livestock are not realistically up to date and this could potentially influence a farmer’s tax position negatively.