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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