Media Statement, 15 December 2015, NZ Farm Forestry Association.
Afforestation, Taxation, and the Paris Climate Talks
The Paris climate deal is likely to focus Government’s attention on making the Emission Trading Scheme work to accelerate the national rate that land is afforested, either as new planting or replanting, because currently this is the most cost-effective way that New Zealand can sequester carbon to meet our emission reduction targets.
Hopefully the Paris agreement will simultaneously focus Government’s attention on other policies that are needed to encourage more afforestation, and to continue to support the research and market infrastructure required to diversify the quality and range of tree species planted.
These include procedures that ensure forestry is treated equitably with agriculture as a land use, and that attach a monetary value to further eco-system services provided by forestry, such as the mitigation of soil erosion and flood damage, the reduction of waterway pollution, and nature conservation.
Another change that is required if the Government wants the private sector to invest in afforestation is an amendment of the way that the Inland Revenue Department treats forestry.
The value of immature standing timber to a seller is very different from its value to a buyer. Under the Income Tax Act 2007 the seller must declare the sale of standing timber as income when it occurs. However the buyer cannot deduct the cost as a matching expense at the time.
Instead, the buyer must carry the ‘cost of timber’ in an account until he ‘disposes of the timber’ by sale or harvesting. If the purchaser harvests the trees in the same year he buys them, the rule is fine. However if harvesting is unlikely to happen for decades, it creates irreconcilable differences between the buyer’s and seller’s estimate of forest value. This illiquidity alone dissuades people from investing in forestry, but it is also an obstacle to the consolidation of small, immature and potentially uneconomic forests. If such owners could consolidate their holdings through collectivisation or sale, it would allow them economies of scale in managing, harvesting and marketing their standing timber. These productivity gains would deliver better returns and improved tax revenues from the sector.
The New Zealand Farm Forestry Association advocates that standing trees be treated as a ‘going concern’ with no tax payable on transfer, as with GST. The person who planted and managed the trees would get a tax deduction; the person who harvested them would get a tax liability; and it would not matter if they were different people. Everybody would benefit.
The time has come for forestry to be encouraged. The long time frames involved require stable policies that give confidence to investors that they are doing the right thing for both the environment and their back pocket.
Dean Satchell, President, New Zealand Farm Forestry Association
09 407 5525, 021 235 7554, email@example.com