Chapter 3 agriculture allowance studnt

CHAPTER 3

AGRICULTURE ALLOWANCE

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• At the end of this lecture, students should be able to:– Understand the definition of agriculture– Identify qualifying agriculture expenditure– Show the computation of agriculture

allowances/agriculture charge– Understand the treatment of allowance on

disposal or transfer

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Learning Objective

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Introduction

A taxpayer who has incurred exp. in the working of farm is entitled to claim Agriculture Allowance.

The allowance can be deducted from the adjusted income in arriving at the Statutory Income of a business.

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Meaning Of Agriculture

Section 18, ITA 1967: Agriculture means any form of cultivation of crops, animal farming, aquaculture, inland fishing and any other agriculture or pastoral pursuits.

Crops – any form vegetable produce. Farm – any land used for the purpose of agriculture. Replanting

– the replacement of the crop of any product on any area of land to produce on the same area of a crop of the same product and includes reforestation of timber.

– Sec. 34(6)(d) – exp. incurred on replanting is allowed as deduction from GI in arriving at AI

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Qualifying Agriculture Expenditure (Para. 7, Schedule

3) QAE is capital expenditure incurred by a person on the following items:– The clearing and preparation of land for the purpose of

agriculture.– The planting (but not replanting) of crops on land

cleared for planting.– The construction on a farm of a road or bridge.– The construction on a farm of a building:

• Used for the purpose of a business and which is used wholly or partly for the working farm.

• Provided as accommodation for the welfare of the employees who employed in connection with the working of farm.

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Continue Building Constructed on a Farm

– This building can be used in the business of working of farm – i.e. office, stores for harvested crop product and warehouse for fertilizers and equipment.

– Building provided for the welfare or living accommodation for employees (i.e. mosque, temple and labour quarters).

– As alternative, a person may claim IBA instead agriculture allowance

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Continue Expenditure on clearing and preparation of land

– This expenditure includes the following costs:• Removing existing trees and clearing the land.• Constructing the drainage and irrigation system.• Fertilizing the land.

Planting expenditure– It includes the cost of planting of the new crop.– It not include cost incurred after the point of

planting the seedlings.– Cost of up keeping, maintenance, fertilising and

pesticide are NOT planting exp.These costs are revenue exp. and deductible from

GI in arriving at AI.

Qualifying Agriculture Expenditure

Clearing & preparation

of land*Exclude:

• cost of land•Cost of PM

New planting *Exclude:

• cost of land

Construction of road/

Bridge on farm

Construction ofFarm & building

Use in business

living acc. for

employees

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Continue

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Person Entitled To Claim Agriculture Allowance

In order to claim agriculture allowance, the personMust be the owner at the end of the basis period.Must incurred the qualifying agriculture exp.The assets must be in use in the business.

Paragraph 25(b) – AA will not be granted if the above requirement will not be fulfilled.

Paragraph 25(a) – AA will not be granted for the YA in which asset is sold if the asset is not in use for buss. Purpose within 1 month before the sale

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Example 1

Desa Bhd. (accounting year ending 30 June) has been operating a cocoa plantation since 2000. In 2007, the company constructed a new office building and used it in the business until 31 Dec. 2011. On 12 Jan 2012, the building was sold to Pandan Bhd.

Answer:

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Rate Of Agriculture Allowance

Clearing and preparation of land for the purpose of agriculture. 50% [Para. 23]

Planting of crops on land cleared for planting. 50% [Para. 23)]

Construction on a farm of a road and Bridge. 50% [Para. 23]

Construction of a building provided for the welfare/living accommodation for workers

20%

[Para. 22(a)]

Any other building used in business

(e.g. estate office, smoke house).

10%

[Para. 22(b)]

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There is no initial allowance given on qualifying agriculture expenditure.

Any agriculture allowance that cannot be fully absorbed in a year of assessment is carried forward to the following YA.

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Example 2Growing Fast SB, incurred the following capital expenditure for the financial year 31 August 2010:Cost of land RM500,000Land clearing RM200,000Seedling and fertilizing RM480,000Construction of:Labour quarter RM160,000Office building RM120,000

Compute the agriculture allowance for YA 2010-2012

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Answer 2Land clearing Planting Labour

QuarterOffice

Building

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Disposal Or Transfer Of Assets

Paragraph 24(a) – states that when a person transfer or sells an asset which is in use within 1 month before the transfer or sale, he is entitled to only part of the allowance in the basis period for YA the asset is transferred.

Agr. allowance is apportioned on a time basis up to the date of transfer.

The calculation of agriculture allowance for the transferor:– No. of days from beginning X Agriculture allowance

of basis period to the day of

transfer or sale……………… 365

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The apportionment of Agr. Allowance is based on the basis period of the seller, not basis period of purchaser.

The purchaser is entitled to the balance of that agr. allowance in the basis period for which the sale took place.

The purchase price of asset is irrelevant in calculating the agr. allowance for the purchaser.

For the subsequent YA, the purchaser can claim full amount of agr. allowance if the farm or asset used for the purpose of business.

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Example 3Refer to example 2; GFSB sold the entire assets to APR on 1/3/2012. APR financial year 31/12)

Compute the agriculture allowance for YA 2012 and YA2013

GFSBLand clearing Planting Labour

QuarterOffice

Building

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Answer 3APR

Land clearing Planting Labour Quarter

Office Building

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Agriculture Charge (Para. 26, Sch. 3)

An agriculture charge arises when:– Received grant from government (state/statutory).

• Grant or subsidy is received from govt. to relieve burden of any capital incurred by person on the farm.

• The agriculture charge is equal to the sum of grant receivable made on the person in the basis year for which the sum first become receivable.

• The agriculture charge shall be deemed to be first payable in the period of cessation if such grant is payable after the disposal of farm.

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Disposal within 6 years.– Where a person disposes of an asset within 6 years

of the date on which QAE was incurred and agr. allowance have been given , an AC is made on him (The 6 years threshold takes effect from 13 Sept. 2003, prior 13 Sept. 2003, imposition was 10 years).

– In the event the disposal took place after the permanent cessation of farm business, the disposal shall be deemed to have been made in the year of cessation.

– The agr. charge is equal to the total amount of agriculture allowance made to that person on that qualifying exp.

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Election For Spread Back (Para. 27, Sch. 3)

The taxpayer can make an election under Para. 27, to spread back the agriculture charge evenly over the YA in which the agriculture allowance is given.

The election must be made within three months (or the longer period as the Director General may allow) of the beginning of the YA for the basis period in which the disposal is made.

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