Forest investment not simple

Wednesday 22 Jan 2020

Forestry investment far from straight forward venture - As forest fires, and climate change debate, rage across the Tasman (and our thoughts and best wishes go out to our Australian cousins), the topic of forestry in New Zealand has arisen over the Christmas break.

Most of the barbecue conversations have been quite generic, for example focusing on what the true impact of the planting of a billion new trees will have on our ecosystem as we strive towards addressing our carbon neutrality goals via a massive carbon sink consuming hundreds of thousands of acres, whether intense forestation of otherwise productive land will have a material negative cash-flow consequence for NZ in the short term (e.g. milk sells annually, trees are harvested every 25 years or so), and whether the regularity of forest fires in NZ will also increase as we experience forestation and climate change.

We even debated the concept of farming carbon credits, versus (or to exclusion of caring about) wood, and the long-term impacts that could have on good forestry management.

I also listened to an interesting podcast about the collapse of Myan civilisation being partly attributed to regionalised climate change arising from significant local deforestation, leading to droughts and the breakdown of social structures, and pondered what impact intensive re- forestation could have on some regions in NZ, if any. But I am getting off topic.

Forestry has been a popular form of investment over the years, including through fractionalised ventures like Limited Partnerships, with investors ranging from large corporates, investment funds, managed syndicates/partnerships, through to small personal holdings or a utilisation of sub-par land within existing farms.

Against the backdrop of climate change and expectations around the potential changes to rules pertaining to trading carbon credits, plus the Government’s Billion Tree Programme and associated incentives, based on the discussions I have had, there is an increased interest in forestry as an investment, notwithstanding short-term price fluctuations for wood.

Of course, people were interested in how the tax of forestry works ...

Taxable income is derived from almost any disposal of timber, which includes disposal of sawn or standing timber, or the grant of a right to cut and remove timber. This also includes insurance proceeds when a forest is destroyed.

When land is sold which contains a stand of trees which is a forest block (not merely a shelter belt or ornamental), a market valuation should be obtained to determine whether any gain in the value of the trees should be returned as income.

It also follows that the purchaser of the land with the stand of trees will then use this value as their cost base. This is often forgotten about when farms are sold. Transfer upon death may also trigger tax consequences.

Where income has been derived from the disposal of timber, there could be significant income (and therefore tax), depending on the size of the block in question. While the general rule is that income is taxable in the year in which it is derived, there are provisions within the Income Tax Act 2007 relating specifically to timber.

The nature of these provisions is to provide a concession with respect to the timing of income derived.

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Source: Otago Daily Times

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