Previous Page  434 / 822 Next Page
Information
Show Menu
Previous Page 434 / 822 Next Page
Page Background

GAZETTE

SEPTEMBER 1988

wh i ch is

Collins -v- FrazerJ

The

facts of the case were that the

t a x p a y e r c a r r i ed o ut

s e v en

separate processes which were the

felling of trees, t r immi ng off of

branches, reducing the trees to

lengths varying f r om 5 to 30 feet,

further reducing to 5 f t. lengths,

reducing these lengths into planks,

converting the planks into thin

boards and then, finally, making up

t h e t h i n b o a r ds i n t o b o x e s.

McGarry J. held that profits f r om

t he first f i ve processes we re

t a x a b le as d e r i v ed f r om t he

o c c u p a t i on

of

w o o d l a n d s.

Conversely, such profits wou ld be

exempt f r om taxation in Ireland.

If there is a lesson to be d r awn

f r om the case, it is probably that

the occupier of wood l ands should

do as mu ch as possible at the

p r o c e s s i ng s t age in order to

maximise the tax exemption. It

may even be wo r t hwh i le to enter

into a joint venture arrangement

w i t h a saw-miller or other timber

processer in order to ensure that

the ma x i mum benefit is gained

f r om the tax exemption.

Forestry as a Trade

The preceding paragraphs looked

at the i ncome tax e x emp t i on

provided by the Finance Act 1969.

In 1979, relief for losses incurred

" i n the occupation of wo o d l a n d s"

was abolished.

4

There are reasons

for thinking that the assumptions

unde r l y i ng t h is legislation are

fundamentally w r ong and t ha t, in

f ac t, forestry should be treated as

a normal business, the expenses of

wh i ch are allowable in the normal

wa y . In other wo r ds, if forestry is

a " t r a d e " , then forestry losses are

normal trading losses wh i ch are

allowable in the normal wa y.

Historically, occupation of land

was not taxed as a normal business

activity. Schedules A and B of the

I ncome Tax Code p r ov i ded a

f r amewo rk for raising t ax on

national profits. This was perfectly

understandable in the con t ext of

the structure of land owne r sh ip in

the U.K., consisting as it did of vast

tenanted estates. In the modern

context of owne r - occupa t i on and

scientific farming methods, wh i ch

have been applied w i t h particular

success to the p r oduc t i on of

t i mb e r, t he na t i onal basis is

d i s t i nc t ly unreal. And, indeed,

Schedules A and B we re abolished

in Ireland by the Finance Act 1969.

5

The idea still persists, however,

t hat forestry activities do not

constitute a trade. The proponents

of that argument point to a U.K.

case,

Coates -v-. Hotker

Estates

Co.,

6

in wh i ch it was held that an

e l ec t i on t o be t a x ab le under

Schedule D rather than Schedule B

did not mean that the activity

b e c ame a t r ade. The au t hor

suggests that this case can be

distinguished under Irish law, on a

number of counts, but principally

on the grounds that Schedule B

does not exist in Ireland and

alternative bases of assessment do

not exist here as they do in the U.K.

Tax Code. Nowhe re does the Irish

legislation say that commercial

forestry activities are not a trade in

the technical sense; it is simply

assumed that they are not because

t hey were not in the past.

If this argument is correct, and

commercial forestry activities are

indeed a trade in the normal sense,

the position then is that losses can

be o f f set against other income.

There wo u ld be other conse-

quences for companies, such as

availability of group relief and

c o n s o r t i um relief.

7

A l s o, re-

tirement relief for capital gains tax

could be claimed if the forestry

activity were a trade.

8

A test case

is called for.

Creating a Trade

If one concedes, for the sake of

a r g ume n t,

t h a t

c omme r c i al

forestry activities are not a trade,

one should then consider whe t her

a f o r e s t ry a c t i v i ty can be

structured so as to bring it in some

wa y w i t h in the Case 1 assesment

rules, t he r eby ma k i ng " l o s s "

( d e v e l o pme nt

c o s t s)

relief

available. One possibility might be

for the l andowner to f o rm a

management c ompany and to

a r r ange f or t he ma n a g eme nt

company to be remunerated by

reference to ultimate profits (while

being obliged to bear all of the

development costs at the outset).

If

p r o p e r ly

s t r u c t u r e d,

an

arrangement of this nature should

ensure that the company is taxable

under Case 1 of Schedule D (in

wh i ch case losses could be o f f set

aga i n st o t h er i n c ome of t he

company or surrendered by way of

group relief). Such a company

wo u l d not be en t i t l ed t o t he

u l t i ma te e x emp t i on f r om t a x,

howeve r, unless the structure had

been altered in the meantime so

that the profits, wh en they arise,

arise to the " o c c u p i e r" of the land.

Pension Fund Linked

Investment

A more interesting, and more

practical, arrangement for private

individual investors is a Pension

Fund Linked Investment. This is a

new concept developed by one of

the new generation of forestry

management companies, wh i ch

has been d e v i s ed w i t h t he

objective of linking the inherent tax

efficiency of pension funding w i t h

the tax advantages of forestry.

The a r r a n g eme nt c o u ld be

described as a Pension Mortgage.

On t he a s s ump t i on t h a t t he

investor does not already have

pens i on a r r a n g eme n t s, or his

e x i s t i ng

a r r a n g eme n ts

are

inadequate, he wou ld enter into a

contract for a Retirement Annu i ty

Scheme. These pension plans

permit 2 5% of the value of the

fund to be taken as a tax-free lump

sum on retirement.

9

The investor

wou ld then obtain a long-term loan

wh i ch wou ld provide for a single

repayment, funded by the tax-free

lump sum received on maturity of

the pension.

The proceeds of the loan wou ld

be invested in forestry through a

who l ly own ed private company.

The company wou ld lease the

property to a forestry management

company or, indeed, to another

c o m p a n y c o n t r o l l ed by t he

investor. The purpose of the lease

is to ensure that the company 's

income is rental income, liable to

tax under Case V of Schedule D.

This being the case, income tax

relief at full marginal rates will be

available to the borrower on all

interest payments. The tax analysis

of the t r ansac t i on is t hen as

f o l l ows:

(i)

The i n v e s t or o b t a i ns a

deduction for interest paid

during the t e rm of the loan,

on t he bas is t h a t

t he

company is one of wh i ch he

is a director and the income of

wh i ch is chargeable to tax

under Case V of Schedule

D ;

i o

(ii) The investor will receive tax

relief f or t he r e t i r eme nt

a n n u i ty p r em i ums at his

marginal income tax rate, up

to 1 5% of his net relevant

earnings.

11

198