Farm Forestry New ZealandDeath, your forest and taxes
Murray Downs, New Zealand Tree Grower February 2006.
Two accountants are in a bank when armed robbers burst in. While several of the robbers take money from the tellers, others line the customers against a wall and proceed to take their money. While this is going on, accountant number one jams something in accountant number two’s hand. Accountant number two whispers ‘What’s this? Accountant number one replies ‘It’s the $50 I owe you.’
Death does not allow such impromptu arrangements of your financial affairs, especially if you own a forest.
Up until now, many tax advisors accepted that if you owned forestry trees of any age in your own name, or in the name of a partnership, then when you died there was tax to pay on your share of the market value of the trees as at your date of death. Not that death made your immature trees able to be harvested so that you had cash to pay the tax.
Worst still, in more recent years, the Inland Revenue Department ruled that the entity that inherited the forest was deemed to have purchased the forest at nil tax value, and nil GST value, because no money changed hands. In effect, one forest had to pay tax and GST twice just because you died.
These have been the motivating reasons for many foresters to be advised to use a loss attributing qualifying company to own their forest, and you will find more information about these in an article on page 17 of the May 2005 Tree Grower. You own the shares in the company, not a forest. So when you die, there is no tax on your trees, as the company continues to exist and to own the forest. Your estate just transfers your shares.
If you had the forest in a trust that would be fine as long as the trust had other income to offset the forestry losses that occurred from planting up until harvesting. Assets in a trust are unaffected by your death.
The neat nimble new
Taking effect from 1 October 2005, Section FI 7 of the Income Tax Act 2004 says –
‘When timber, standing timber, or a right to take timber owned by a deceased person is left to a person who is related to the second degree, the transfer to the administrator or executor of the estate and the subsequent transfer to the beneficiary is at tax book value.
This exclusion recognises that immature forests, in particular, are difficult to value.’
Using plain English, this means that if you own timber trees, or have a joint forestry venture and you die, as long as your will leaves the forest to a spouse, sibling, child, grandchild or grandparent, then there is no tax.. The forest’s sale value in your books to the date of your death is the same as the forest’s original cost in your books – which for many farm foresters is nil. The cost for those who inherit the forest will be the same as the cost was in your books, a tax neutral result.
So what does this mean?
There is less impetus to use a loss attributing qualifying company in the future if you have a small forest, such as labour intensive special purpose species block. This can save a lot on legal and accounting costs. You must have relatives, and you should check that your will provides specifically that your share of the forest goes to relatives.
If you have other business interests owned in your name or partnership name, such as rental properties, farms, land dealings or buildings that are substantially depreciated, then a slightly different set of rules applies to these other assets. Each has a different twist, and you need to review your will with your accountant, and probably your solicitor as well, to see if or when you qualify for the expected tax relief that the Income Tax Act 2004 can provide.
It is very hard to plan a will that successfully survives the future years of legal and tax changes, especially as today many people wisely have family trusts and companies. We revamped our trusts and wills recently, and decided in very general terms to allow flexibility for the future. But you still have to review your will. We jog memories of clients by making wills a subject of every year’s questionnaire.
Re-evaluate
If you already have your forest in a company or trust, then nothing has changed. Hopefully you are well protected from tax on your death, but family situations change over time. If you make further forest plantings, then you should re-evaluate whether you want to use these companies and trusts for those plantings. In a lot of cases it will make good sense to put any new forestry investments through these existing entities. Do not overlook that a simpler method is now available. There are other reasons for using a company structure – to reduce legal liability if disastrous fires are started, or for cover if the forest should fail from wind, pest or disease, or if future environmental regulations impose restrictions on your forest.
Hopefully, we can trust the politicians not to tinker any more with these fairer rules of death, tax and your forest. However tax rules on forestry have changed 15 times during the years that an average radiata forest grows to maturity.
In summary do not wait until you are faced with tax on your death – review your will and your estate plans.
Murray Downs, Down to Earth Accountants – This article is simplified and cannot be relied on to cover all situations. We recommend you seek professional advice.
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