Supreme Court of Appeal decision on whether grapes delivered to a co-operative winery, pressed and pooled, constitute produce held and not disposed of for purposes of the First Schedule to the Income Tax Act

  • taxpayer derived a portion of his taxable income from wine farming. In particular, he received payments from a co-operative winery (the “co-op”) in respect of grapes which he delivered to the co-op for the purpose of being made into wine.
  • The South African Revenue Service (“SARS”) assessed the taxpayer on the basis that the grapes that he had already delivered to the co-op constituted “produce held and not disposed of at the end of the year of assessment” in terms of paragraph 3 of the First Schedule (“First Schedule”) to the Income Tax Act.
  • The Tax Court’s decision was in favour of SARS, whereafter the taxpayer took the matter on appeal to the Supreme Court of Appeal (“SCA”). The issues on appeal to the SCA were as follows:
    • whether the income received by the taxpayer, which is generated by the sale of wine, constitutes income “derived from agricultural or farming operations” for the purposes of section 26 of the Income Tax Act;
    • whether the pressing of the grapes resulted in them no longer constituting “produce” in terms of paragraph 2 of the First Schedule; and
    • if the pulp did constitute “produce”, whether the subsequent pooling of the pulp, with the pulp belonging to other members of the co-op, resulted in it no longer constituting “produce held and not disposed of” by the taxpayer.
  • With regard to the first issue, the SCA held that wine farming consists of a number of different operations, and that the transformation of grapes into wine does not remove the income from the sale of such wine from the ambit of income derived from agricultural operations.
  • With regard to the second issue, the SCA held that regarding the nature of the product, it could not be said that such extensive processing had occurred that the grapes had lost their identity by being mixed with numerous other commodities and survived only as an inseparable part of a factory product. Moreover, the context in which “produce” was to be considered for purposes of the First Schedule was essentially similar to that of the trading stock provisions in section 22 of the Income Tax Act. In this regard, the SCA held that the rationale for such provisions was to provide for a more accurate estimate of profit or loss for purposes of tax calculations. Given the period of time between the incurral of expenditure and the accrual of income in wine farming, it would not be sensible if grapes were excluded from the meaning of produce as soon as they were pressed at the co-op.
  • With regard to the third issue, the SCA held that ownership of the grapes was never transferred to the co-op. The taxpayer simply became owner of an undivided share in the pooled grape pulp. The payments he received from the co-op were his pro rata share of the proceeds of the sale of the wine, less marketing and production fees due to the co-op. The produce was therefore never disposed of by the taxpayer.
  • On this basis, the SCA concluded that the decision of the Tax Court had been correct and the appeal was dismissed.
  • Find a copy of the judgment here.