Income derived from game farming
Section 26(1) only applies to income derived from the carrying on of pastoral, agricultural or other farming operations. The Supreme Court of Appeal in CIR v D & N Promotions (Pty) Ltd 1995 (2) SA 296 (A), 57 SATC 178 considered the meaning of the term “derived from”. The court quoted with approval the explanation of the meaning of this term from the court a quo which held that –
“the income and the source from which it arises, namely the farming operations, which embraces numerous agricultural activities, must be directly connected. An indirect connection or remote one will not suffice”.
Also in the court a quo Levinsohn J stated that –
“the legislature intended farmers to be placed in a privileged position as far as their entitlement to deduct capital expenditure from farming income and hence the concept of income derived from farming operations ought to be strictly construed, see Ernst v Commissioner for Inland Revenue 1954(1) SA 318(A) at 323C–D.”
A taxpayer may earn income from distinct businesses, namely, farming operations and other operations – it is only the income which is directly connected to the farming operations which will fall under the ambit of section 26(1). For example, in ITC 128516 the court found that the prize money from racing horses, which the breeder had initially intended but had failed to sell, was not part of the taxpayer’s stock farming and horse breeding business and did not therefore fall under section 26(1).
The same principle applies to game-farming operations. Some activities will generate income directly from the game-farming operations and will be regarded as game-farming income, while other activities and the income derived from them will not be regarded as such.
The following types of income are regarded as being derived directly from game-farming operations:
• Income from the sale of live game.
• Income from the slaughter and sale of game meat, carcasses and skins.
• Fees received from hunters to hunt the game.
• Income derived from supplying guides and trackers used in a hunting expedition.
Income not derived from game farming
The income earned from the following activities is not regarded as having the required direct connection to game-farming operations and accordingly will not be regarded as game-farming income:
• Accommodation and catering.
• Admission charges payable by persons spending holidays on the farm.
In determining whether or not game-viewing fees (for example, the fee paid to go on a game drive) constitutes income from game farming, it is necessary in the first instance to determine whether or not the particular taxpayer is conducting a farming operation. This will depend on the facts and circumstances of the particular case and will take into account whether the taxpayer has a genuine intention to make a profit from the raising of livestock and whether the objective review of all the facts supports that contention. For example, game viewing conducted in conjunction with other uses such as the hunting and sale of the game may be a part of a valid farming operation.
However, when game viewing is incidental to activities which do not constitute farming activities, the income from game viewing will not constitute income from farming operations. For example, certain eco-tourism operations the purpose of which is tourism and accommodation and those elements are the revenue and profit generators, while the game viewing serves as an attraction and is an incidental revenue generator.
Income derived from activities which give rise to income from game farming and those which do not will have to be accounted for separately since the deductions provided for under the First Schedule can only be used to reduce the income derived from farming operations.