The Income Tax Act provides for a natural person who derives income from farming operations to elect (within three months after a year of assessment) to be subject to tax according to a rating formula, instead of the normal income tax tables. The reason for this option is the (sometimes) abnormal and unpredictable way in which income accrues to farmers in one year of assessment, in comparison with another year, for a variety of factors such as extended periods between sowing, harvesting and droughts. Although the rating formula essentially seeks an equalisation of the tax rate between years of assessment, it does not exempt a farmer from income tax on any taxable income.
The rating formula dispensation involves a complex calculation, that centres around the average taxable farming income of the person involved. Where a taxpayer carried on farming operations prior to the commencement of the current year of assessment, the annual average taxable income from farming is determined with reference to the current and four previous years of assessment during which the farming operations were carried on. If it is the first time that a person carries on farming operations, the average taxable income from farming in the first year is deemed to be two-thirds of that taxable income. A balance of assessed loss brought forward should not be considered when determining the taxable income from farming for that year.
The effect of the rating formula that a farmer is accommodated on their effective tax rate where, in the current year of assessment, there is an excess of farming income over the average farming income, since this excess can be deducted as an element in the rating amount. Generally, application of the rating formula should, therefore, be to a farmers’ benefit in years where there is an excess of farming income, while they should not be prejudiced in years where there is no such excess.
The rating concession also applies to executors of deceased estates and trustees of insolvent estates. Once the option has been exercised to adopt the equalised rates, this election will be binding on the taxpayer for the current year as well as all future years of assessment, irrespective of the fact that farming operations may be terminated. Taxpayers who intend to make use of this favourable option, are therefore encouraged to seek professional advice before any election is made. Despite its complexities, it could be very favourable to farmers, especially where income varies significantly from year to year.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)