Forestry and a capital gains tax
From New Zealand Tree grower August 2017
Both the Labour and the Green political parties are considering a capital gains tax. Calculating the capital gains on property, shares or other products may appear to be relatively simple. However, calculating the capital gains on a forestry investment is virtually impossible.
Over a 25 to 30-year rotation the inflation adjusted price per cubic metre may fall, but because of forest growth, the return will actually increase. It is very difficult − almost impossible − to determine what proportion of the increase in value can be attributed to forest growth and which should be attributed to a change in the price per cubic metre.
How are any capital gains to be assessed? Not all plantations have similar costs. A farmer may plant and tend a plantation on their farm, but keep no record of when or how much was actually spent. On the other hand, a forestry company may have maintained good records of actual costs but have no record of overhead costs.Will the basis of any calculations be the same? If it is not, then any calculation must be inequitable. In addition, over what period is the capital gain to be assessed?
In 1964 I was a forestry university student in England. My degree included an extra course in forest taxation. The then UK Labour Government was proposing to introduce a capital gains tax. Before details of the tax were announced we had a discussion in our class on how a capital gains tax might be applied to forestry.We conclude there was no way the tax could be applied fairly.When details of the capital gains tax were finally announced, forestry was excluded.
In the late 1980s our finance minister, Roger Douglas, seemed convinced that forestry investments were being inadequately taxed. As I understood his intentions, he was proposing to tax forest owners yearly on how much their forest had increased in value over the last year.This ignored the fact that forest owners may have no plantation income until eventual harvest.
In discussion with him I pointed that under such a tax scheme no one would invest in New Zealand plantations. Investors would move to countries such as in South America. His response, as I recall, was that his proposal was logical and let investors go to South America. Fortunately, Douglas’s forest tax scheme was never implemented.
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Disclaimer: Personal views expressed in this blog are those of the writers and do not necessarily represent those of the NZ Farm Forestry Association.