Taxation of Farming Enterprises

Transcription

1 Taxation of Farming Enterprises i) Definition o Farming has been defined in the income tax act as any husbandry, pastoral, poultry, fish rearing or agricultural activity but excludes the letting of property for such purpose. If a person lets property that is used for farming purposes, the income that arises from such property is not farming income. It is still income from letting of property and shall be assessed as such. Only income that arise from the various activities as mentioned in the definition above qualify as farming and/or fishing income. Farming enterprises include both unincorporated farming businesses and incorporated farming enterprises ii) Faming Capital Allowances Farming enterprises are entitled to the following capital allowances on the qualifying assets which are used wholly and exclusively for purposes of farming (1) Farm implements o These include implements, plant and machinery which are used in the farming business o Implements used directly in farming qualify for wear and tear allowance of 50% o Examples of implements include Tractors Ploughs Irrigation implements Harvesting implements o Implements not used directly in farming qualify for wear and tear allowance at the normal rate of 25% while non-commercial vehicles qualify for wear and tear allowance at 20%. (2) Farm improvements o This is any permanent work including a farm dwelling and fencing appropriate to farming and any building constructed for and used for the welfare of employees in relation to farming land owned or occupied by the farmer claiming the allowance for ascertaining profits. o A farm improvements allowance at the rate of 100% of the expenditure is given on the cost of the farm improvements o Qualifying expenditure includes Construction of barns and other storage buildings

2 Construction of farm dwellings. These should be permanent buildings and must not be used by the farmer claiming the allowance as the homestead for their family. Fencing Construction of buildings for the welfare of employees. (3) Farm works o These are all the works which are carried out on the farm o They do not include farm improvements, industrial buildings nor commercial buildings o The farm works allowance is available at the rate of 100% on the expenditure incurred on the farm works o Qualifying expenditure includes the following: Works for the prevention of soil erosion Carrying out aerial and geographical survey Wells Boreholes Stumping and clearing Water conservation works (4) Development allowance o This is given for capital expenditure incurred on the development of a plantation. o The rate of development allowance is 10%. o It is given as a deduction against the profits of the charge year in which the expenditure is incurred. o It may be given as a deduction in the following year if there is no income in the year of expenditure o Examples of plantations on which such expenditure may be incurred include: Tea plantations Coffee plantations Cocoa plantations Orange plantations Citrus fruits plantations

3 Practice question a) Moses has been in farming business for five years preparing accounts to 31 July each year. Below is a summary of the capital expenditure incurred for the year ended 31 July 2013 during which his tax adjusted profit before deducting capital allowances amounted to K1,747,710: Farm dwelling (15 units) 350,000 Stumping and clearing costs 110,000 Water conservation 125,000 Wells 115,000 Tractor* 215,000 Computer for office 18,000 Toyota car for Moses (25% private use) 183,000 Nissan car for farm manager (20% private use) 70,000 Fencing of farm 108,560 Clinic for employees 245,500 Pineapple plantation 250,000 *Moses received a government grant of K50,000 towards the purchase of the tractor Required: i) Compute the amount of Capital Allowances available to Moses for the tax year ended 31 July (12 marks) ii) Calculate the final taxation farming profits chargeable on Moses for the tax year (5 marks) b) What is a farming enterprise according to the Income Tax Act? (3 marks) K (Total: 20 marks)

4 Solution a) Moses i) Computation of capital allowances for the tax year ended Value Bus CA Total Cas Marks Implements, plant and machinery K K K Tractor Purchase cost (215,000-50,000) 165, Wear and Tear -82,500 82, Income Tax Value c/f 82, Office Computer Purchase cost 18, Wear and Tear Allowance (@25%) -4,500 4, Income Tax Value c/f 13, Toyota car Purchase cost 183, Wear and Tear Allowance (@20%) -36,600 75% 27, Income Tax Value c/f 146, Nissan car Purchase cost 70, Wear and Tear Allowance (@20%) -14,000 80% 11, Income Tax Value c/f 56, Total for IPM Allowance 125, Farm works Stumping and clearing 110, Water conservation 125, Wells 115, Total for Farm Works Allowance 350, Farm improvements Farm dwelling (Restricted to *15) 300, Fencing of farm 108, Clinic for employees 245, Total for Farm Improvements Allowance 654, Development Pineapple plantation (250,000*10%) 25, Total for Farm Development Allowance 25, Total Capital Allowances 1,154,

5 ii) Computation of the final taxation farming profits chargeable for the tax year 2013 K Marks Tax adjusted profits before deductions 1,747,710 1 Less: Capital Allowances -1,154,710 1 Final Taxable Farming Profits 593,000 2 Professional presentation 1 Total Marks 5 b) Farming has been defined in the income tax act as any husbandry, pastoral, poultry, fish rearing or agricultural activity but excludes the letting of property for such purpose. If a person lets property that is used for farming purposes, the income that arises from such property is not farming income. It is still income from letting of property and shall be assessed as such. Only income that arise from the various activities as mentioned in the definition above qualify as farming and/or fishing income. Farming enterprises include both unincorporated farming businesses and incorporated farming enterprises (1 mark for each valid point up to a maximum of 3 marks) (Total: 20 marks)