Forestry with lifestyle
Murray Downs, New Zealand Tree Grower May 2006.
Some business and tax advice for new owners seeking to combine forestry with lifestyle benefits.
To be eligible for tax deductions on your forestry property, your activities need to qualify as a business. If you are buying a forest block from scratch and want significant lifestyle benefits, there are some key features to look for in a property. Sound business decisions and knowledge of tax issues are equally important if you are going to get the most from your new forest block.
Recently, I came across an excellent example of a forestry business block, but with lifestyle. Three family members bought an old quarry, with some existing neglected forest. They let the large open cast mine fill up with water to serve as a water supply for fire fighting. It is entirely incidental that this water supply also doubles as a water skiing lake.
They caught up on the silviculture by doing a one hit pruning and thinning, which was better late than never. And they planted up the remaining nooks and crannies. Now they have a popular spot for the siblings and cousins to visit, work at and enjoy. They have a forestry business with a big lifestyle element.
Choosing for lifestyle
Many would-be foresters still live and work in town. Ideally, your new forest block should be under 90 minutes travel time from your home, otherwise you will not get there often enough to be able to do some work – the real reason you want to travel to it. All weather access right up to the block is essential – no problem if you can find an old quarry site or something similar. A location not too far from a main arterial route is the best, but is negotiable. Having a nearby farm community for fire support and security would also help.
The holiday element
You want to enjoy a holiday flavour when you are at the forest block. Those who enjoy our native bush can grow your own – given 10 years. But water is an asset. When you fly over the North Island west coast you see so many beaches surrounded by partially developed farmland or scrub. Have you got the money to develop access to a property like this? Alternatively, a property within five minutes of any public beach, lake, river or stream would be a top choice.
Other lifestyle possibilities with a forest element include mountain biking over forest access roads and tracks, four wheel driving challenges, fishing, hunting or punga growing.
Choosing for business
The business decisions
Assuming you read the November 2005 Tree Grower article about being in business, and you have had access to the Waikato Branch How to grow leaflets for each of the main timber species, you will be alert to the essential features that a good forestry block should have. The real art, of course, is to see the potential in a block for something different, something that no other potential purchaser sees.
Before purchasing a property, evaluate your time and resources. Usually money is the main limiting factor. Think hard about the commitment that a unique or difficult site always requires. One well-respected senior farm forester says he would always spend more money on better land, than to forever suffer the negative consequences. Once gorse infested, always gorse infested.
Business activities are essential
Remember, the predominant use of your forest block must be business. What are some good work or forestry business projects you can do while visiting your property? Basic forestry items like roading, weed control, possum and other pest control, silviculture, maintenance, weather and forest records, establish and measure permanent sample plots, forestry health inspections and fencing are just a few. If you do not want to do any of these things, you do not really have a business property – it is really just a private holiday block.
The touchy tax issues
As a general rule, if there is a private element in any expense, then there will probably be an issue. Will travel to the forest property be tax deductible? The answer depends on the predominant reason for travelling. If you do no work, then there is no deduction, other than one or two inspection trips a year. You should keep records of what work you did on a daily basis and of the kilometres travelled to the property. If you do seven hours work in a day, then that qualifies as a work day. The work does not have to be too strenuous, and it can be multi-purpose, such as a walk through your young forest in spring looking for dothistroma or topping up the possum bait stations.
Accommodation in the forest block
Is accommodation tax deductible? If you build accommodation and its only use is for you, as the business owner, and your children to stay in, it is really no different from a private home. In other words, no deduction. In contrast, a shed that is filled with permanently stored forestry equipment is a depreciable business asset. Anything in between these two extremes will probably need some adjustment for private or business use, so get advice first.
Fringe Benefit Tax
Many forests are owned by family companies. Check with your accountant about any Fringe Benefit Tax issues if company assets are available for private use, such as having available a company vehicle for private use.
Water storage for fire fighting purposes is clearly a business asset. On most occasions any private use of that water is incidental – as in the water-skiing example above. Building a treated swimming pool would be a predominantly private activity and therefore not eligible for any tax deductions, unless you show that you have the pumping equipment to use the water to fight a fire in an emergency.
The best of both worlds
With careful planning, intelligent thought, and the preparedness to demonstrate that you are somewhat hands on, you can have the best of both worlds. A forestry block with business deductions combined with lifestyle.
Murray Downs is a chartered accountant