18 November 2021

As most people would be aware, the interest in land being sold so it can be planted into trees is increasing. Driven largely by the opportunity for carbon credits, the increasing interest is having an influence on land values for other agricultural uses. In turn, the debate on whether it is right or wrong is far more prevalent that it has ever been.

Forestry excluding planting for land maintenance takes many forms in farming operations. It can range between uneconomic blocks to large scale areas planted out for retirement or to supplement future income streams. Either way, for there to be a legitimate business and to claim a deduction for expenses relating to those trees, you need to grow the trees with the potential for sale of timber or carbon.

There are specific rules around deductions for expenses in the Income Tax Act as well as rules around deductions available for harvesting costs, including temporary tracks.

Generally, deductions for expenses can be taken as they are incurred. These include expenses relating to the planting or maintenance of the trees, including the cost of seedlings, the cost of planting those seedlings, trimming and thinning the trees and any other costs directly associated with the growing of those trees.

Generally, income is recognised when the trees are harvested. Income may also be generated when the following occurs:

1. A Forestry right is issued to someone other than the current landowner, this is the “right to take timber”.

There are specific exclusions where a forestry right is issued to the current landowner for example as part of the preparation for selling the land to a third party

2. The land is sold with the trees on it.

The trees would potentially be deemed to be sold at market value, which can often be overlooked by both parties to a sale and purchase agreement, but should form part of that agreement.

There are specific rules regarding this in the Income Tax Act.

Once income from forestry has been derived, there are options available around spreading this income into future and past years.

This may take the form of a spread forward into future years using the Income Equalisation Scheme. However, this option is not available to all forestry businesses as there are specific exclusions to its use for forestry income.

The other option is the spreading provisions specific to forestry income that allows certain taxpayers to spread income to any of the three preceding income years.

Every situation is different and there are several specific facts to be considered when looking at the options available to each business with Forestry income and expenses. For assistance, speak with your adviser or get in touch with the Findex Accounting and Business Advisory team.