Johannesburg - In the tax world, grapes that are turned into pulp and then into wine has definitely not disappeared or lost their identity. They stay the produce of the farmer who harvested them, no matter what their form.
A recent judgment shows the pitfalls for farmers in terms of how they have to account for any produce (from farming operations) that has not been disposed of at the end of their tax year.
A taxpayer, Dr HC Avenant, lost his case before the tax court when he objected to his tax assessment, and proceeded to the Supreme Court of Appeal about being taxed on his harvested grapes that were made into wine.
He argued that he delivered his harvested grapes to a cooperative winery, which was pressed into pulp, mixed with the pulp of other members of the cooperative and processed for wine.
By the end of his tax year (in this case 2009), his grapes were no longer grapes, they were pulp. Dr Avenant argued that his “produce” was harvested grapes, and that he therefore did not have any “produce held or not disposed of” at the end of his tax year.
The South African Revenue Service (Sars) did not agree with his argument and included an amount of R789 338 in his taxable income for the 2009 tax year for “closing stock from farming operations”.
The tax court found in favour of Sars, but found the amount of R789 338 “manifestly erroneous, unfair and unreasonable” and ordered Sars to reasses the taxpayer.
Judge KGB Swain said in his judgment on June 1 the fact that the grapes have been pressed into a pulp and the process of fermentation begun, does not mean the taxpayer’s produce has disappeared.
“It is still there, albeit in a different form . . .. Because of the delay between the harvesting of the grapes and the sale of the wine, and the consequent delay between when expenses are incurred in producing trading stock and realising the proceeds thereof, no balancing can take place unless the existence of the pulp is taken into account in that tax year.”
Law firm Cliffe Dekker Hofmeyr observed in an article about the case that the taxpayer retained ownership even though the grapes were delivered to the winery.
“The pulp remained the taxpayer’s own produce derived from his farming operations and he therefore had to have accounted for his produce,” said Heinrich Louw, associate director of the firm.
The court said in its judgment the fact that Dr Avenant owned an undivided share in the mixed pulp did not absolve him from having to account for his produce.
“If this were not so, farmers could mix their produce together before the year end to avoid having to account for closing stock,” the judge found.
Piet Nel, head of the technical tax division at the South African Institute of Tax Professionals, said he agreed with the judgment.
“Judge Swain agreed that the farmer retains an undivided share in the resultant pulp. As such the farmer still held produce and had to include the value thereof in his income for tax purposes.”
Nel added that produce of farmers includes fractional ownership of pooled produce, which is similar to trading stock used by other taxpayers in manufacturing.
The other issue the court had to grapple with was the value of the pulp that had to be included in the taxpayer’s income for tax purposes.
Dr Avenant argued that the pulp held no value. The court disagreed. The wine that was produced from the pulp was intended to be sold at a profit, and in each year Dr Avenant received “positive returns” from his share of the sales.
The court found that by using the distilling wine price the value of the grapes can be calculated in a practical and workable way.
Louw commented that for the natural product to no longer constitute “produce” as the taxpayer argued in this case, the product will have to lose its identity.
“Whether such a loss of identity has occurred will depend on the product as well as the nature and extend of the processing or treatment to which it is subjected.”
In this case, the grapes did not lose their identity, they merely transformed into something many people enjoy on a regular basis.