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GAZETTE
SEPTEMBER 1988
Taxat ion Aspects of Forestry
Investment
T h r o u g h o ut t he g r ea t er p a rt o f t h i s c e n t u r y, t i mb e r has b e en
i d e n t i f i ed as a s t r a t e g ic r e s o u r ce me r i t i ng Go v e r nme nt i n c en t i v e s.
I r e l a nd s u f f e r s a s e r i ous s h o r t a ge of r ese r ves of g r o w i n g t i mb e r
w i t h less t h a n 6 % of o u r l a nd a r ea u n d er f o r e s t. T he a v e r age f o r
EEC c o u n t r i es is 2 0 % . I n I r e l a nd w e p r o d u ce less t h a n 1 0 % of o u r
t i mb e r needs f r om our o w n r esou r ces. The p o s i t i on in B r i t a in is very
s i m i l ar w i t h , a g a i n, 9 0 % o f d e m a nd b e i ng me t f r om i mp o r t s.
T h e p a t t e rn is r e p e a t e d, a l t h o u gh less d r ama t i c a l l y, in t he EEC
i n gene r al w h i c h s a t i s f i es on ly ha lf of i ts t i mb e r r e q u i r eme n ts f r om
i t s o w n r ese r ves. Wo r l d w i d e, i n d u s t ry p r o j e c t i o ns of d e m a nd f a r
e x c e ed s upp ly a nd it is a r g u ed t h a t t he re is a s t r o ng case f o r f u r t h er
i n v e s t me n t.
The logic of investing in Irish
forestry is particularly compelling.
In Scandinavian countries Sitka
Spruce can generally achieve
g r ow th rates of 4 cubic metres per
annum per hectare. In Britain this
rises to be tween 11 and 14 cubic
metres, while in Ireland the annual
g r ow th rate is a staggering 20 to
2 4 cubic metres.
In order to encourage investment
in Irish f o r es t r y, p r o f i ts f r om
commercially managed woodlands
have been exempt from taxes since
1969. There are also significant
capital acquisitions tax incentives.
In addition, there are very valuable
State and EEC grants available to
the private forestry developer.
1
This article discusses the tax
planning aspects of an investment
in forestry and looks at some
p a r t i c u l a r ly
t ax
e f f e c t i ve
a r r a n g eme n ts
t h a t
can
be
implemented.
I n v e s t or P r o f i le
The concept of private forestry
i n v e s t me nt in Ireland is still
relatively new as this area has
been, predominantly, the exclusive
domain of the Forestry and Wildlife
Service. Recent years have seen
the emergence of a number of
p r i v a te f o r e s t ry ma n a g eme nt
c omp a n i es
and
a
g r o w i ng
awareness of the attractiveness of
private forestry investment.
Private investors in f o r es t ry
range from investment Institutions
(such as Irish Life and Allied Irish
I n v e s t me nt Bank) t o p r i v a te
individuals. It is such private
individuals t hat this article is
primarily concerned w i t h. Some
may have land of their o wn wh i ch
they wish to plant, perhaps to
enhance its amenity value, but
generally they will see forestry as
a long-term stable investment w i th
cons i de r ab le upside po t en t i a l.
Forestry should be v i ewed as a
long term proposition (a) because
of the length of time it takes for the
by
Michael F. O'Reilly
Tax C o n s u l t a nt
asset to mature (although there are
increasing signs of a market in
s em i - ma t u re f o r e s t) and (b)
although in the long term returns
f r om forestry are good and have
outperformed equities over lengthy
periods, they do not compare
favourably w i th the returns that are
available f r om time to time f r om
short-term investments such as
Managed Funds, Insurance Linked
Bonds, e t c. Of cou r se Black
Monday may have changed that
particular v i ew.
The profile of the typical private
i n d i v i d u al
i n v e s t or
m i g h t,
t he r e f o r e, be a se l f - emp l oyed
professional who sees forestry
either as a means of augmenting
his pension arrangements or as a
tax effective means of providing
for next generation inheritances, or
both.
The Tax E x emp t i on
P r o f i ts
r ea l i sed
f r om
t he
occupation of woodlands in the
State wh i ch are managed on a
commercial basis, w i th a view to
the realisation of p r o f i t s, are
exempt f r om income tax.
2
It is
questionable, however, whether
the exemption provides any real
incentive in view of the length of
the life cycle of timber. In many
ways, the position wh i ch obtained
prior to 1969 was preferable. Until
t h a t y ea r, p r o f i ts f r om t he
occupation of wood l and could be
assessed either under Schedule B
of the income tax code (now
abolished) wh i ch gave rise to a
fairly nominal amount of tax, or the
taxpayer could elect to be taxable
under the normal rules of Schedule
D. If the election was made, the
development costs of the forest
could be treated as a tax " l o s s " .
The present position in the U.K. is
the same as that wh i ch prevailed
in Ireland until 1969, although it
will change w i th effect from this
year.
It is important to consider the
precise extent of the Income Tax
Exemption. This question has been
examined in a number of decided
cases, the most information of
M i c h a e l O ' Re i l l y.
197