Are you in the business of forestry?
Murray Downs, New Zealand Tree Grower November 2005.
As a farm forester, what tree tax deductions are you entitled to? It all depends whether you are a lifestyler, investor, farmer or forester. This article looks at the main tree planting and tending costs, and how their treatment can be different.
Do not assume that you are in the business of forestry. Otherwise your tax deductions may have some surprising limits. The article has been kept fairly brief and so cannot cover all situations.
Hobby farmer and lifestyler
The following tests help determine whether you are in the business of forestry or just following a lifestyle or hobby
- The scale of the operation and volume of transactions – a minimum of two hectares of trees confirms a forestry business.
- Your commitment of time, money and effort to forestry and your forest block. For example did you go to the latest farm forestry conference? Do you read the Tree Grower? Did you complete a financial and feasibility investigation into your decision to plant trees?
- Your projected financial results – people in business usually do a cash flow to see how much they are going to make out of their trees. Keep it, update it and keep good tending records. The key is that this should show you expect to make a profit.
- The reasons for being in business – is it private recreational pursuit, carried on for personal refreshment and recreation. In other words, is it a grand glorified garden rather than a slick tended forest. Or are you always testing some new dubious pet tree species on a small scale?
If you end up being deemed a hobby forester and lifestyler, then no tree planting costs are deductible. Of course, the Inland Revenue Department has the last word, and if you subsequently sell a few garden trees for a profit, then you will need to declare the income.
If you are deemed to be an investor, then the costs of planting, pruning and forestry management are not immediately available to you. To be a forester, in the business of forestry and entitled to those immediate forestry operation deductions, make sure that your forestry investment structure allows you to –
- Have the right to control the forestry operations and are consulted to approve their undertaking before the work is done
- Receive reports on the forest development and management, and be able to physically visit the forest and inspect work done even if you have appointed an outside forestry manager
- Be legally entitled to the final trees and logs, and not just a share of the proceeds. Land owners, and joint venture right owners are usually also legally entitled.
A farming or agricultural business, the business that is the principal business undertaken on the land, is limited to making deductions on tree planting expenses to $7,500 in any one year. Most take this to refer to the tree planting and tending costs of small forestry blocks, shelter planting, pond, amenity and biodiversity plantings. This $7,500 limit does not apply to the planting of trees for the purpose of preventing or combating erosion.
The $7,500 can set a limit to amenity plantings. For example it can cost you $10,000 to plant one hectare of amenity natives in one year. Planting natives for timber is another story and is not covered here. If a farm has clearly distinguished sizable forestry timber managed blocks, then the property will probably have both separate farm and forestry business purposes. Farmers have a few perks over forestry, such as immediately deducting 100% of fencing costs, initial weed and pest costs and the pre-plant clearing of stumps, scrub and undergrowth.
Make sure these farming things are done while the farmland is being farmed, not the year when it is to go into forestry blocks. Pure foresters have to depreciate these costs.
Farms can cover a multitude of sins. Sometimes I wonder how many farm sheds or haybarns are home built from home grown timber and whose proceeds never saw a profit and loss statement, and whose building costs are not recorded on a depreciation schedule.
For agroforestry – farmland managed for both forestry and farming income from the same land – one 1986 court case ruled that how that taxpayer practised agroforestry was a farming or agricultural business, and not a forestry business. He was therefore limited to $7,500 of tree planting deductions in any one year.
Farmers clearing forestry land for pastoral use have some generous immediate tax deductions for the ‘destruction of weeds or plants detrimental to the land’, and the ‘clearing, destruction, and removal of scrub, stumps and undergrowth’.
By now you should know if you are in the business of forestry or not and the best tax deductions come to those in the business of forestry. From tree planting and onwards the basic forestry operation costs are deductible as they are incurred.
If you are replanting an existing forest, clearing and preparation of the land costs should be included as part of the contract of harvesting. It makes sense while all the bulldozers are there to do that work, and it means you get an immediate deduction for the next crop against the sale of the current one.
If you do the land preparation work later, you are supposed to depreciate that expense year by year. Similarly, when you first convert land to forestry, the work of clearing, weed and pest control, and preparation of the land prior to planting, should be depreciated.
If you are already a forester and want to acquire more forestry, then the costs of investigating each additional forestry block can be argued to be a part of the existing forestry business, and therefore deductible. These costs are not deductible for the first start up forestry business.