Download RTF - Review of Business Taxation

Plantations Australia
Joint Submission on Review of Business Taxation
Second Discussion Paper – A Platform for Consultation
by
The National Association of Forest Industries & Plantations Australia
The National Association of Forest Industries (NAFI) represents companies, individuals and
organisations involved in the forest and forest products industries. NAFI presents the forest
industries’ views to the people of Australia, governments and public authorities on matters
relating to the national development and use of forests and forest products. NAFI’s vision is an
ecologically sustainable Australian society based, in part, on dynamic, internationally
competitive forest industries.
Plantations Australia is the industry sector focus group for larger corporate plantation timber
growers and processors. The organisation aims to gain and maintain bipartisan support of all
levels of Government and the community for the timber plantation industry and to be a driving
force behind the “2020 Vision” – national plantation strategy.
NAFI and Plantations Australia do not wish to make a comprehensive submission on all aspects
of the “A Platform for Consultation” Discussion Paper. The Paper contains a number of sound
recommendations that have the potential to benefit industry and the community generally.
However, NAFI and Plantations Australia wish to express the strongest possible concern about
the option set out in “A Platform for Consultation” in relation to the taxation treatment of
standing crops (3.22 page 130). If implemented this option would bring most of the timber
plantation establishment programs in Australia to a standstill.
Timber Plantation Policy
At least since the 1960s Australian governments have had a commitment to expanding
Australia’s capacity to produce timber from plantations. This policy has been pursued because
of the wide range of benefits which timber plantations can provide including income and
employment generation, regional development, diversification of rural economies and repair of
and protection from environmental degradation. Over the last decade governments have tended
to move away from providing direct funding for plantation development projects and have
focussed on removing the institutional impediments to plantation expansion and to encouraging
private sector investment in the industry.
The Wood and Paper Industry Strategy (WaPIS), released by the Commonwealth Government
in 1995, included a goal to “promote plantation development by ensuring that tax treatment of
plantations is reasonable and favourable to investment” (p14). Unfortunately there have been
delays in completing some of the specific commitments made in the WaPIS and there has been
little or no effort made to publicise the taxation arrangements for plantations. Due to this delay,
the joint industry-government national plantation strategy, “Plantations for Australia – the 2020
Vision” (1997), reiterates the earlier commitments. Action 25 of the 2020 Vision aims to create
“a taxation environment that is fair and not prejudiced against plantations compared with other
land uses and that recognises the length of time before plantations generate an income stream”
(page 22).
Nature of Timber Plantation Investment
The main costs of establishing plantations are incurred in the first year or two of the life of the
investment. These costs include securing suitable land, preparing land for planting, purchase of
seedlings, planting, fertilising and protecting the trees. Once the trees are well established the
financial commitment is greatly reduced and may be limited to monitoring and protecting the
plantation.
Despite the large initial outlay to establish a timber plantation no income is normally realised
until somewhere between year 10 and 20 depending on the nature of the trees being grown and
the product being produced. The final harvest and primary income from the plantation may not
be realised for 30-50 years in cases where slower growing tree species are being used to produce
large logs.
Countless reviews have shown that a key reason deterring potential investors from investing in
timber plantations is the long lead-time between incurring the cost of plantation establishment
and receiving income from harvesting the final product.
Proposed Option for Taxation Treatment of Standing Crops
Under the current taxation arrangements the costs of establishing and tending a timber
plantation are immediately deductible. The plantation owner becomes liable for the payment of
tax either when the timber is harvested and sold or when the right to harvest the timber is sold.
The Discussion Paper contends that this arrangement provides significant tax deferral benefits
that are not available to other investors. It is therefore proposed that deductions be deferred
until the value of the final crop is realised. However, the proposed remedy does not recognise
the economic cost of such a deferral, a cost that does not have to be borne by other investments,
which yield immediate returns. If deductions were deferred for 30 years or more the present
value of such a deduction would be close to zero and therefore the economic cost of a timber
plantation may be up to double that of a short-term crop that is allowed an immediate tax
deduction.
The Discussion Paper also suggests that the option proposed would move the taxation treatment
closer to the accounting treatment set out in Australian Accounting Standard AASB 1037
“Self-Generating and Regenerating Assets”. In fact, the proposed tax treatment will go well
beyond what is already a questionable accounting treatment. AASB 1037 will treat the
progressive increase in value of standing trees as income but will allow as deductions all
planting and maintenance expenditure when incurred. The forest owner will have to pay tax on
unrealised income progressively over the life of the plantation, but only after all costs have been
recouped. Other businesses are not required to recognise profits as assessable income until
they are realised, so plantation forestry is placed at an economic disadvantage. The injustice of
this situation would be compounded by the proposal that no deductions be allowable until
income is realised.
The plantation industry has serious concerns about the Accounting Standard and the problems of
attributing an appropriate value to standing trees, particularly during the period before any
economic harvest is possible or where there are no immediate buyers in the market place.
Taxing unrealised profits will encourage the earliest possible sale of timber rather than
encouraging the best silvicultural practice.
Leaving aside the difficulties of the Accounting Standard, if investors in plantation growing are
forced to defer the deductions associated with establishing the plantation for say 20 years,
plantation establishment would become completely non-viable relative to other forms of land
use. The proposed change to the taxation treatment of standing crops would further compound
the disincentive to the long-term investment required in timber plantation enterprises.
NAFI and Plantations Australia note that smaller plantation growers, farm foresters and
investors would also be severely disadvantaged by the proposed treatment of deductions
associated with planting and tending tree crops. The concerns of these groups are presented in
a separate submission to be made by Australian Forest Growers.
Other Issues
On a more positive note NAFI and Plantations Australia are pleased to note that the proposals in
the Discussion Paper affecting profits a prendre should lead to tax being paid on a more
reasonable basis. However, it could still be argued that further changes are required to provide
an equitable taxation environment for companies and individuals investing in timber plantations.
Conclusion
The proposal that deductions associated with the establishment of standing crops be deferred
until the value of the final crop is realised is unjustified and discriminates against long-term
investment. While this submission focuses on timber plantations, it is understood that there are
a number of other crops that would be significantly disadvantaged by the proposal.
Given the commercial and environmental importance of re-establishing tree cover over large
parts of rural Australia, and the huge commitment which governments, industry and the
community have made to this task, NAFI and Plantations Australia submit that the costs of
establishing and tending a timber plantation should continue to be immediately deductible
Robert Bain
Executive Director
National Association of Forest Industries
15 April 1999
Contact:
Mr Richard Stanton
Ph: 02 6285 3833
Mble: 0412 500 838
Email [email protected]
PO Box E89
KINGSTON ACT 2604
Angus Pollock
Chairman
Plantations Australia