Capital development expenditure

Section 11(a) prohibits the deduction of expenditure of a capital nature. The First Schedule, however, provides an exception to this general rule for persons who carry on farming operations and have incurred expenditure of a capital nature as listed in paragraph 12. Paragraph 12 also applies to persons carrying on game-farming operations.
Amounts qualifying as a deduction under paragraph 12 include amongst others expenditure incurred for –
• the eradication of noxious plants and alien invasive vegetation;
• the prevention of soil erosion;
• dipping tanks;
• dams, irrigation schemes, boreholes and pumping plants;
• fences;
• erection of or extensions, additions or improvements (other than repairs) to buildings used in connection with farming operations, other than those used for domestic purposes;
• the building of roads and bridges used in connection with farming operations; and
• the carrying of electric power from the main transmission lines to the farm apparatus or under an agreement with the Electricity Supply Commission under which the farmer has undertaken to bear a portion of the cost incurred by the Commission in connection with the supply of electric power consumed by the farmer wholly or mainly for farming purposes.

The expression “in connection with” (see 6th and 7th bullet above) was considered by the Tax Court in ITC 885. After an analysis of a number of cases dealing with the subject, the court concluded as follows:
“It seems to me that it is possible to extract from these judgments a number of guiding rules. One must give to the phrase “a wide and comprehensive meaning” but not as wide and comprehensive as to embrace a remote and indirect connection. There must be something in the nature of a direct connection and this must be subservient and ancillary to the particular business under consideration.”

The direct connection to game-farming operations is important. Expenditure incurred on facilities like slaughter rooms, meat rooms, cooling rooms, biltong rooms, skin rooms and trophy rooms will generally have the required connection in order to qualify for deduction under paragraph 12.

In contrast, expenditure incurred on facilities used to accommodate visitors and hunters will not have the required connection and will not qualify for a deduction by a game farmer under paragraph 12. Similarly, the cost of buildings erected in connection with a canning or other industry run in conjunction with the farming operations will not be deductible under paragraph 12.

Expenditure on the construction of roads and bridges will also only qualify as a deduction for a person carrying on game-farming operations if they are used in connection with the farming operations.

The deduction available for capital development expenditure (excluding expenditure incurred on the eradication of noxious plants and alien invasive vegetation or the prevention of soil erosion) is ring-fenced. The deduction available in a particular year of assessment is limited to taxable income from farming before claiming the deduction.

The excess is carried forward and is deemed to have been incurred in the following year of assessment.35
Under paragraph 20A of the Eighth Schedule a farmer who ceases to carry on farming operations and who subsequently disposes of the immovable property on which they were carried on, can, subject to the limitations specified in that paragraph, elect to treat any un-deducted balance of capital development expenditure as expenditure incurred and paid in respect of the immovable property. In this way the un-deducted balance of capital development expenditure may form part of the base cost of the farm property for CGT purposes.

The development expenditure under paragraph 12(1) is not subject to recoupment under section 8(4)(a) because that section, with some exceptions, only applies to the deductions under sections 11 to 20. Paragraph 12(1B) and (1C) contain special recoupment provisions for paragraph 12 assets that become movable assets.