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
Proposed Tax Changes
General rules of deductibility apply
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
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
Deductible if planting occurs within 18
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
All returns to an investor will be assessable
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
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
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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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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