The optimum structure for owning a farm in South AfricaPublished on 15 Sep 2020
Having the right structure in place is very important for a farming business, not only as far as running the business is concerned but also for the purposes of succession planning. Farmers can opt for either farming in a company, in a trust or in their own name. There is no right or wrong structure, but there will be an ideal one for each person’s circumstances.
One positive of using a company structure is the ease of doing business. Being regulated by the Companies Act provides companies with a defined legal structure in which to operate. It also offers flexibility, continuity and a low tax rate. Taking money out of the structure, though, will cost money in the form of Dividend Tax. Under Section 7C of the Income Tax Act, donations tax can be payable on interest free loans to companies underneath a trust. It may be better to charge interest because the company would be able to claim a deduction. Unclaimed capital expenditure is not forfeited on the death of the farmer.
Trust structures also offer flexibility and continuity, but reduced ease of doing business. Trusts are not recognised everywhere internationally and the tax rate for trusts is relatively high at 45%. It can, however, be reduced if profits are distributed to beneficiaries. Unclaimed capital expenditure is not forfeited on the death of the farmer. Unlike for companies, there is no tax cost when taking money out of the business for living expenses.
Farming in your own name
Farming in your own name with the land owned by a company or trust can be quite beneficial. Section 7C is not a problem, neither is there a tax cost to take money out of the structure. Cost in respect of capital expenditure on the land can be claimed against farming income and losses can be deducted from other income.
There is no continuity on the death of the farmer, however. It may be advisable – for the purposes of VAT and unclaimed capital expenditure – to transfer the business before death. It is also advisable to acquire licences and long-term contracts in a company or trust as opposed to in your own name.
Based in Cape Town, Charl du Toit is a Partner in our Tax Advisory Division and specialises in Corporate International Tax, families and trustees specifically with cross border trust and corporate structures.
Photo credit: JW Brand Solutions
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