The Capital Gains Tax (CGT) on forestry has remained unchanged. Commercial woodlands in the hands of an individual are exempt from CGT on the growing timber, though any gain attributable to the underlying land is not.
However, this rarely gives rise to a chargeable gain because it can often be shown that afforestation devalues the land due to the permanent change of use. The CGT exemption does not apply to companies which occupy woodlands.
Nevertheless, timber is a crop. The convention has always been that in the event of a sale of woodland, the standing crop of trees was deemed to be a capital transaction, whereas when harvested it falls under the heading of income.
I admit I have always had some difficulty in getting my head around this particular conundrum.
In May 2010 the result of a tax appeal was made public. The facts of the case involved a company that sold semi-mature woodlands and the Revenue Commissioners held that the company was liable to CGT on the entire proceeds of sale.
The company appealed the assessment, holding that the value of the underlying land had fallen since it was purchased several years previously, and that the proceeds attributable to the growing crop were income and therefore exempt from corporation tax (the sale having taken place prior to the change in the law when there was no income restriction in place).
The case was quite specific in that the company had always intended from the outset to trade in forestry property.
In other words, it always planned to sell properties at a profit as and when the opportunities arose and to re-invest the proceeds in more forestry.
Accordingly, the company had always regarded the woodland as trading stock and it was treated in the profit and loss accounts and the balance sheets in that way since the properties were acquired.
The company argued that, aside from specifying that any profit or gain must arise from the occupation or use of woodlands, the law did not specify how precisely that profit is realised and it is left entirely to the taxpayer to decide how best to realise the gain/profit.
The company further argued that the section does not limit its application only to a scenario involving trees growing on land being cut down and sold.
Instead, the exemption is framed in far broader terms to cover profits or gains arising from the occupation or use of woodlands managed on a commercial basis.
The Revenue Commissioners argued that it is profits or gains arising from the commercial occupation of woodlands that are exempt, as opposed to the disposal of woodland in its entirety.
They also argued that the treatment by the taxpayer of the woodland as trading stock was not a determining factor.
In upholding the appeal, the Appeal Commissioner indicated he was not convinced by any of the Revenue's arguments and his ruling now forms part of the tax code.
It now appears that the Revenue has adopted this ruling and is extending it to apply to all forest sales and a dispute has now arisen because the high earner's income restriction is now being applied to forest sales, even where presumably the owner may not have accounted for his woodland as trading stock.
The Revenue commissioners now maintain that people who sold forests in 2010 and 2011 are subject to the restriction where the proceeds of the sale of the crop exceeded the €80,000 threshold.
This has resulted in another case being made that the sale of a woodland is a capital transaction and therefore income rules should not apply. The matter is likely to result in a further tax appeal hearing.
Appeal Case 175/09 started a much needed process to clarify some ambiguities and inconsistencies in the legislation.
Clearly further clarification is necessary, otherwise as long as the income restriction and CGT exemption remain in place, argument will continue over whether or not the sale of woodland is a capital transaction, depending on which side of the fence you are sitting.