The Gazette 1988

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 Tax E x emp t i on P r o f i ts r ea l i sed 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 f r om

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.

M i c h a e l O ' Re i l l y.

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