434 / 822
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
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