Author: Howard Moore

In a useful article in the Tree Grower (November 2016) Nick Ledgard thoughtfully defined wilding conifers, and gave a wide-ranging review of the arguments for and against.  He wrote with authority, and manages a forest of these species with first-hand experience of their performance, production and control.  Sitting in Wellington far from the problem and without that background, I have a different perspective.

At around the time Nick wrote his article I became involved in spinoff work from the 2015-16 review of the Emissions Trading Scheme.  At that time the Paris accord on climate change was only a year old but it was already clear that, as Tom Hanks put it, “We have a problem.”

Carbon Match in its newsletter of Thursday 17 November 2016, said

Under the Paris Agreement, New Zealand expects to have a 2021-2030 carbon budget of approximately 611 million tonnes.  But based on business as usual emissions forecast we would potentially emit approximately 840 million tonnes, (creating) a deficit of some 230 million…  Our hope?  Help from international markets, provided (that) cheaper abatement can be sourced from them.  But as expected, progress on the details of how international market mechanisms might operate has been slow.  Meanwhile our onshore easy-win abatement opportunities appear to be limited, and we don’t seem to have a cohesive plan…

Nothing has changed.  Although the emissions overshoot of 230 million tonnes hit the news at the time I have met people since who are astonished at the idea, so perhaps it’s still not widely understood.  MFAT officials have been working to find countries from which we might buy carbon credits; and while this is allowed under the Paris agreement the rules have yet to be drafted, let alone agreed, and there is no talk yet about prices.

Officials seem to hope that international carbon prices will remain low until around 2030, making the cost to New Zealand (in some way) acceptable.  However they acknowledge the risk:

Up to 80 per cent of New Zealand’s target to cut emissions… by 2030 is expected to be met through the purchase of international credits.  But in a confidential briefing paper to climate minister Paula Bennett last May, officials said that the strategy was risky.  [Carbon News 10 February 2017]

Of course climate change advocates have been arguing that we should establish another million ha of forests to sequester carbon, and the Government is taking some action.  However not everyone is convinced, progress is slow and trees do not grow overnight.

Largely the decision on whether or not to plant more trees rests with individuals and the industry, i.e. ‘the market’.  The ETS review is aimed at making ‘the market’ more efficient, for example by reducing compliance costs and harvest liabilities in the expectation that this will encourage landowners to plant forests where they are appropriate; but it will be over to them to decide whether to plant, or whether to sell their land for planting.

Right now ‘the market’ is not encouraging commercial foresters.  Land suitable for production forestry is expensive; it is hard to get approvals for overseas investment; and even at $25 per NZU, carbon prices aren’t sufficiently high to overcome these hurdles.  In a forward scenario of managed carbon prices this environment is unlikely to change much.  Farmers might start planting, but they are unlikely to produce a million ha of new forests.

What has this to do with wilding conifers?  Well, in short:

1. A deficit of 230 million tonnes of CO₂ is somewhat huge. Aside from agriculture our 100 biggest emitters today put out about 14 million tonnes of CO₂ a year.
2. Supposing the Government is right and carbon prices stay flat, the likely cost of making up the carbon deficit will be around $6 billion, spent offshore with no onshore benefits. In reality the cost might be higher (Treasury estimates range up to $37 billion).
3. Clearly officials believe that the $6 billion or more couldn’t be better spent here, else Government investment would be going into those initiatives – and it’s not.
4. Supposing officials are right – and I doubt it – as a taxpayer I am still concerned at the risk. New Zealand could be held to ransom over the supply of offshore credits.  They might be necessary, but I’d far rather we did all we could to get our emissions under control now, even at a perceived higher cost.
5. Wilding conifers offer a risk management strategy. For them, we don’t need foreign investment.  We don’t have to buy the land.  We don’t need nurseries for planting stock.  We don’t have to plant and tend the trees; many of them are already in the ground.
6. Of course that will mean we lose grassland to forests, with all of the environmental implications of species displacement and water yield. But climate change is already nasty and becoming worse.  We can expect more severe floods, droughts, pests and diseases, wildfires, landslides, coastal erosion, species loss, refugees and immigration.  Our landscapes, lifestyles and wellbeing are heading downhill now, and will never be the same.  In that perspective, the managed loss of grassland to forests looks pretty benign.

Nick Ledgard’s colleague suggested that the idea of growing wilding conifers for carbon storage was ‘a bit like saying that farming rabbits is a solution to improving our export earnings.’  Well, if rabbit farming is better than your existing land use, why not?  Perhaps rather than looking at wilding conifers as a problem we should be looking at them as part of the solution, and spending some of that $6 billion plus on developing a really strong ‘rabbit-proof fence’ to contain them – not killing them as pests.

Howard Moore
16 October 2018.

Howard Moore is a Wellington business analyst who has been involved with forest finance for over 30 years, in terms of loans, leases, forestry rights and sale and purchase agreements.  He closely follows climate change issues in relation to forestry and is a member of the Forest Investment Action Group of the NZFFA.

There are 3351 pages in the Income Tax Act 2007 and it keeps on getting longer.  Because it treats farmers differently from foresters it pays to know why, and where, and what that means if you have a mixed land use.  Happily it’s not too hard to pick out the highlights so if you are growing trees for timber, here’s a summary.  I don’t claim it’s all relevant or sufficient or true, but I hope it’s useful.  The idea is to give you enough information to ask the right questions of some professional you are paying for an answer.  It’s sometimes surprising – and distressing – to find you know more than they do.

The Act is available online and if you are keen, for download, on http://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1512301.html

The first thing to understand is the language.  It’s important to know how IRD thinks about you as a landowner, and why you need to define yourself for tax purposes.  For IRD, a ‘forester’ always grows timber while a ‘farmer’ grows trees.  ‘Timber’ is live, harvestable wood while ‘trees’ are not harvestable, though equally big and green.

With this as a guide you should make sense of the points below, which are given in a sort of alphabetical order.  References to parts of the Act I’ve shown in square brackets [so].

Carbon credits:
If you are growing either timber or trees and earn NZ Units from post-1989 forests under the Emissions Trading Scheme, they are not taxable on issue or surrender, but create taxable income on sale [CB 36].
If you were issued NZ Units for pre-1990 forests, they are effectively capital and not taxable on issue, surrender or sale, [CB 36 and CX 51B].
If you buy and hold stocks of NZ Units for trading then you must value them each year [ED 1], deduct the value at the start of the year from the value at the end of the year, and pay tax on the difference [DB 49] as if it were cash income.

Fencing: this is fully deductible if you are a farmer [DO 1] but depreciable at 10% of the diminishing value (DV) if you are a forester [Schedule 20 and DP 3].  One might think the fence around a forest to keep animals out would get the same wear and tear as a fence around a paddock but IRD thinks not.  If you have planted trees in a catchment and fenced them off to prevent stock entering them, you have a choice: are you fencing to protect the trees, or the water quality?  If the latter, your fence looks fully deductible.

Harvesting and marketing: part of administration costs, and fully deductible for foresters [DP 1].  They are also fully deductible for farmers but like foresters you must declare any income you earn from that harvesting and marketing as part of your normal taxable activity.  Timber harvested and used in the forest or on the farm does not generate taxable income.

Inventory: part of administration costs and fully deductible for foresters [DP 1].

Land clearing: this is fully deductible if you are a farmer [DP 1] but depreciable at 5% DV if you are a forester [Schedule 20].  Of course land cleared for farming might later be subject to a Forestry Right, as farmers must remain flexible about land use change.

Land preparation: this is a capital cost for famers or foresters, depreciable at 5% DV [Schedule 20].

Management, fertiliser, weed and pest control: these costs are fully deductible if you are a farmer managing trees for erosion control, shelter or water quality [DO 2]; and deductible up to $7,500 a year if you are managing for timber [DO 3].  For a forester all management is fully deductible [DP 1].

Planting: planting and planting stock is fully deductible if you are a farmer planting for erosion control, shelter or water quality [DO 2]; and deductible up to $7,500 a year if you are a farmer planting for timber (roughly equivalent to planting around 8 ha a year) [DO 3].  For a forester all planting is fully deductible [DP 1].  Note several Regional Councils offer subsidies for erosion control planting, which do not affect deductibility.

Plant and machinery purchase: this is a capital cost depreciable according to the nature of the equipment.  To find current depreciation rates and methods go to http://www.ird.govt.nz/calculators/tool-name/tools-d/calculator-depreciation-rate-finder.html

Repairs and maintenance: this is fully deductible for farmers and foresters [DG 7 and DP 1].

Spreading of income: Both farmers and foresters can spread income from the sale of timber forward for up to 5 years, using an interest bearing income equalisation account held at IRD [EH 1 to EH 36].  Interest is paid at 3% pa with daily rests [EH 6].  You only pay tax on the amount of income withdrawn from the account in any year.  A forester may also spread income backwards for three years [EI 1, with the rules set out in EW].  It looks as if a forester can use both methods at once, allowing a spread of up to 8 years.

Tracks, roads, culverts and bridges:
For farmers these are capital costs depreciable at 5% DV [Schedule 20].
For foresters these are fully deductible costs if the assets are used for less than 12 months [DP 1]; but capital expenditure if they are designed for a longer life, depreciable at 20% DV if they are partially or not metalled, and 5% DV if they are sealed or metalled [Schedule 20].

Selling standing timber:  Income from the sale of standing timber is taxable [CB 24].  In a sale of land with standing timber, the part of the sale income that’s attributable to the timber is taxable [CB 25].  The buyer of the standing timber can’t claim the purchase as an expense against other income, but must carry it forward until the timber is harvested or resold [DP 11 and EA 2].  This anomaly is because IRD has chosen to make standing timber a ‘revenue account property’ like land for subdivision.  It’s not a big deal if the harvest is imminent, but can be a problem if the harvest is decades away.  Since 2010 the industry has been arguing to remove this anomaly because it affects the marketability of small forests.

Selling standing trees:  The Tax Administration Act 1994 outranks the Income Tax Act and presumes all trees are timber unless proven otherwise.  Trees for shelter, erosion control or carbon are treated as timber, and taxable on their sale as standing trees [CB 25].  Farmers who sell land with such trees should have them valued for tax, or obtain a certificate [Tax Administration Act Section 44 C] proving they are incidental, horticultural or ornamental.  “A certificate as to whether trees are planted mainly for the purposes of timber provides conclusive evidence if it is given by a properly authorised officer of the relevant regional council; or a properly authorised officer of the Ministry for Primary Industries; or any other person suitably qualified.”  This is enlarged on below.

Of course the Income Tax Act has a lot more but the rest is generally less relevant.  If you are interested in navigating it, use the references above as a guide.  You’ll also find it has a search function that highlights all occurrences of your search term, making it easier to find your way.  The big hurdle is in following up cross references to other sections in the Act and when you get there, understanding what they mean.  The really big hurdle is checking to see if what you have is actually all there is, because somewhere, another section or another Act (like the Tax Administration Act) using different language might impact on what you’re trying to do.  I suggest that’s when you call in the experts.

The points above seem to have two interesting implications.  First, it seems to me that because of the identified tax differences, a landowner might improve his position by being a farmer on one part of his land and a forester on the other.  This could be achieved by the farmer entering into a Forestry Right with himself (as a new tax entity to run that part of the land where it was smart to grow timber), while he kept the rest of the farm to grow trees.

Second, it is clear that anyone growing trees on steep land for carbon and erosion control should be aware of tax if they are thinking of selling.  The tax risk could be minimised with a certificate from the Regional Council confirming that harvesting is out of the question; or a certificate from a ‘suitably qualified person’ arguing the harvest costs would outweigh the returns.  Of course costs change and the buyer will have his own objectives, but that’s not the seller’s responsibility.

Howard Moore

September 2018.

Howard Moore is a member of the NZ Farm Forestry Association and NZ Institute of Forestry in Wellington.  He knows little about tax and less about forestry but holds opinions on both and willingly shares his prejudices.