No. 15 Taxation of forestry
NEW ZEALAND FARM FORESTRY ASSOCIATION INFORMATION LEAFLET
Over the past couple of decades, a number of different regimes have
provided for the taxation of forestry ventures. The following provides
an overview of the main aspects of the taxation of forestry income and
expenditure under current law.
Gross income
Cost of timber
Compensation payments
Other expenses
Gross income
When a person sells or disposes of any timber, or sells or disposes of
the right to take any timber, they will be assessed for income tax on
the proceeds of such a sale. Therefore, the Income Tax Act 1994 taxes
not only the sales of harvested timber, but also standing timber and
the granting of cutting rights for any standing timber.
Although the sale of a right to take timber is taxable, where a
forestry owner grants a forestry right to himself or herself under the
Forestry Rights Registration Act 1983, this will not be taxed. Where
timber is sold for a price that is less than the market value of the
timber, the Commissioner of Inland Revenue is entitled to assign a
market value to the sale of such timber.
Although gross income is normally derived in the year that the timber
is sold or disposed of, the Act allows a vendor to elect to spread the
proceeds of sale over a period of four years, being the year of sale
and the previous three income years. The sale proceeds may be spread
over any of those four income years in whatever proportion is selected.
To be able to spread this income, the taxpayer must give the
Commissioner of Inland Revenue a written notice electing to spread the
income, within twelve months of the end of the income year in which the
sale takes place.
Cost of timber
A vendor is entitled to deduct the ‘cost of timber’ from the proceeds
realised from the sale of such timber. The cost of timber includes the
purchase price of the timber where it is purchased as standing timber,
or the acquisition cost of a right to take timber. The cost of timber
does not include:
- deductible expenditure;
- capital expenditure which has given rise to depreciation
deductions,
for example, expenditure on plant and machinery used in the planting or
maintaining of trees;
- expenditure on land contouring or other land improvements, which
are
treated as capital expenditure.
Compensation
payments
If a taxpayer receives a compensation payment, for example insurance
proceeds for the damage or loss of timber, this payment will be
included in the assessable income of the taxpayer. However, the
taxpayer will be entitled to a deduction for an amount equal to the
cost of the timber. This deduction is able to be claimed in the income
year in which the loss or damage occurs.
Other expenses
Generally, indirect and administrative costs, together with
depreciation in respect of forestry plant and machinery are deductible
in the income year in which the taxpayer incurs such expense. In
addition, land development costs are able to be deducted on a
diminishing value basis, akin to a depreciation
deduction.
However, pre-acquisition costs and the acquisition cost of forestry
land will generally not be deductible.
To be able to claim a deduction for expenditure incurred from forestry
operations, a taxpayer must ‘carry on a forestry business’ in New
Zealand. Therefore, this raises the issue of whether forestry investors
who are
only passive investors, in that they only provide equity to the
forestry partnership, can be said to be carrying on a forestry business.
Following a couple of high level decisions in the courts, the following
factors should be taken into account when entering into a partnership
agreement to ensure that the fund provider can be said to be carrying
on the business of
forestry:
- there should be a requirement that funds provided by the investor
should be used for the forestry activities, e.g. planting;
- the investor should be given a right to direct employment of
forest
advisers;
- the investor should receive regular management reports;
- the investor should have a right to be physically involved in the
forestry activities, by way of site visits, inspections and discussions;
- the investor should have entitlement to the tree crop and not
just
the proceeds.
The combination of some or all of these factors is necessary to ensure
that the investor can be shown to be carrying on business operations,
and not merely making an investment in the forestry activity.
(top)
This article by Jeff Morrison and Joanne Ziegler of
Russell McVeagh, appeared in the August 2000 issue of the New
Zealand
Tree Grower.
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