Australia: Consultation Process On Proposed Taxation Arrangements – Plantation Forestry

Last Updated: 13 June 2006

In 2005, the Australian Government announced it would extend the operation of the prepayment for forestry managed investment schemes (MIS) until 30 June 2008. It also called for written submissions on, and subsequently undertook, a review of the application of taxation law to plantation forestry. The review has now been completed.

Following completion of the review and as part of the mid-term Budget announcements, the Minister for Revenue has announced certain proposed tax arrangements for plantation forestry and in particular, the MIS industry. The Government is now seeking the views of industry and other interested parties in respect of these proposed tax arrangements. Written comments are required by 14 July 2006.

Reason for change

The Government has stated that these arrangements are designed to remove the uncertainty surrounding whether MIS investments in plantation forestry are deductible under the current law in respect of the requirement that investors be carrying on a business. The proposed arrangements are also being introduced to reduce the administrative and compliance burden on investors and plantation investment and in particular, the MIS companies.

Proposed tax arrangements

We set out below the proposed tax arrangements and the current position, where applicable:

Investments in Forestry Managed Investment Schemes

Current Law*

Proposed Tax Changes

General rules of deductibility apply (discussed


New rules governing deductibility.

Costs of investment deductible where the cost was either incurred in gaining assessable income or was necessarily incurred in gaining assessable income provided that the cost is not capital in nature. Prepayment rules apply unless certain requirements are satisfied.

If the costs constitute a purchase of trading stock then costs are deductible. However, prepayment rules apply unless certain requirements are satisfied.

Capital costs of acquiring land carrying trees or of acquiring a right to fell trees are deductible. The amount deductible is the portion of the acquisition costs that is attributable to the trees felled during the income year.

Full cost of investment deductible subject to a cap of $6,500 per hectare in the year of expenditure with the balance (if any) deductible in the following year.

Deductible if planting occurs within 12 months.

Deductible if planting occurs within 18 months.

No specific provision dealing with trading in forestry MIS investments.

Trading in forestry MIS investments acquired after 30 June 2008 will be allowed such that:

  • Initial investors to hold interest for minimum period of four years from the date of entering the arrangement for deductions to be maintained.
  • All returns to an investor will be assessable income.
  • Cost of acquiring plantation interests on the secondary market will be deductible against income received at disposal or harvest.

No comparable provision.

Deductibility will be conditional on the certification of the MIS company to ensure best practice in forestry, regional planning, land use and national resource management, under arrangements to be developed by the Department of Agriculture, Fisheries & Forestry.

No comparable provision.

Appropriate treatment of the higher costs associated with boutique forestry schemes, such as sandalwood will be considered in consultation.

No comparable provision.

Individual investors in a MIS will be treated as passive investors for GST purposes, thereby removing them from the GST system. This is subject to the agreement of the States and Territories.

* Based on the public views of the Australian Taxation Office.

Of particular note for the timberland investor sector is the potential for the development of the secondary market in MIS plantations. Although there has been some trading to date, this has largely been in relation to schemes that are coming to an end or are being unwound. This should encourage the planting of longer rotation species (although there are some pine plantations and other species, the industry is presently still dominated by blue gum) and may result in more investment in the secondary markets in Australia, which, compared to countries like New Zealand, has been fairly static.

The proposals have some similarity with the New Zealand tax treatment of forestry investments. In particular, the proposal that the cost of acquiring the MIS interest on the secondary market not be immediately deductible but must be matched against income received from harvest or disposal will be familiar to many investors that already invest in timberlands in New Zealand.

In New Zealand, the tax regime for forestry has been subject to change over time. Under a previous regime, the concept of 'cost of bush' was introduced whereby certain expenditure was not immediately deductible but was capitalised and then expensed against the proceeds from sales of the trees. In the mid-1980s the regime was revised so that most expenditure that related to establishing and maintaining the forest was put to this 'cost of bush' account.

In the early 1990s the regime was again changed, such that most costs associated with planting and maintenance became deductible in the year incurred (same as Australia). However, the 'cost of bush' (now called 'cost of timber') concept is still used in the industry to deal with both planting costs pre-dating the change and, also, with the costs of acquiring existing standing timber/forests, which costs are not immediately deductible in the year these costs are incurred but become deductible on disposal of the trees by either a sale to a third party or on harvest and receipt of income from the trees, as set out in the proposed tax arrangements.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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