Look at ways to minimise tax bill hit on your forestry's pay-day

July 03 2012 04:43 AM

The Finance Act states that the occupation of woodlands managed on a commercial basis and with a view to the realisation of profits is exempt from income taxes for individuals and companies.

Accordingly, farmers who planted their land during the last 25 years did so safe in the knowledge that forestry was one of the activities that was both exempt from income tax and was also eligible for a number of other significant capital tax reliefs.

Today, however, matters are not quite as simple as they were.

A number of years ago the then minister for finance, Brian Cowen, started to look closely at the various activities that enjoyed income tax exemptions and unfortunately forestry did not escape his gaze.

So began certain amendments to this aspect of the tax code and the steady erosion of the reliefs. Representations fell on deaf ears and a more complex system was implemented, still with a series of reliefs and exemption thresholds but also some restrictions.

The net effect was that income from the commercial occupation of woodlands can now be caught in the tax net.

Currently, a forest owner's exemption is €80,000 per annum, assuming that his total income exceeds €125,000. Once that is the case, income tax is levied at the marginal rate.

The casual observer might be forgiven for thinking that €125,000 is a considerable level of income, but of course in forestry terms it isn't.

What it means is that even the small forest owner with perhaps seven or eight hectares of clear-fell can potentially be catapulted into the realms of those now deemed to be the "super-rich" for income tax purposes -- even if it is only once every 35 to 40 years or so.

This might be inherently unjust, but it is now the law and in the current economic climate it appears doubtful there will be any return to the more benign ways of the past.

An important point to note here is that it is the forest owner's profit that is assessed for tax. Aside from being good business practice, since 2004 it has been a legal requirement both to maintain financial records of the forestry business and to include any profits from forestry in one's annual tax return.

Tax planning is part and parcel of running any business and forestry is no exception.

There are a number of measures that can be taken to minimise the liability, and while independent expert advice on tax matters should always be sought, I will mention a few points worth considering.

The annual exemption of €80,000 is available to an individual owner, so if the woodland is in joint names (for example, a spouse or another family member), each owner can avail of the exemption.

The annual expenditure incurred in running the business and in harvesting and selling timber can legitimately be deducted from the gross income received in order to arrive at the net profit. So too can the costs of replanting. And if this operation cannot be carried out in the same financial year as the sale is conducted, a binding contract for this work should be considered.

The important point here is that there are no replanting grants available to help with the establishment of the next crop so, if at all possible, these costs should be offset against the proceeds of the sale at hand, otherwise it will be many years before they can be availed of.

Consideration should also be given to spreading a large sale over two or more financial years, reducing the income in any one year and allowing the exemption to apply more than once to the same sale.

Alternatively, conversion of the woodland to continuous cover, rather than continuing with the more conventional clear-fell system, results in a more frequent and steadier income stream without the large, once-in-a-lifetime windfall. This does involve a fundamental change in silvicultural approach and I will return to this topic at a future date.

It should not be forgotten that all forestry income, including the forest premium, is reckonable for both PRSI and the Universal Social Charge (USC).

Finally, the tax exemption only ever applied to the proceeds from the sale of the raw material, the round timber. Once timber is converted in any way -- for example into firewood, fencing stakes or planking -- the conversion process is regarded as manufacturing and it no longer comes under the heading "commercial occupation of woodlands".

William Merivale is national secretary of PEFC Ireland and a forestry consultant based in Cork. Email: william@cjandco.net