Plantation Management – Regulation and Planning
National - Australia
Legislation
National legislation in practice - including Taxation and Corporations Law
1 Environment Protection and Biodiversity Conservation Act
The Environment Protection and Biodiversity Conservation Act 1999 replaced and consolidated several existing Australian laws including, the Environment Protection (Impact of Proposals) Act 1974, Endangered Species Protection Act 1992, National Parks and Wildlife Protection Act 1975, World Heritage Properties Conservation Act 1983 and the Whale Protection Act 1980.
Under the provisions of the EPBC Act and the Regional Forest Agreements Act 2002, RFA forestry operations (including plantation forest operations) undertaken in accordance with an RFA do not require Australian Government approval. The Australian Government’s statutory requirements relating to environmental impact, world heritage, national estate and threatened species have been addressed in RFAs.
The Jaakko Pöyry report, ‘Facilitating Investment in the Australian Forest Products Industry – October 2002’, was commissioned by the Department of Agriculture, Fisheries and Forestry (DAFF) to investigate opportunities for governments to encourage further investment in the Australian forest products industry. The report did not identify any Australian environmental legislative impediments to the plantation forest industry.
A plantation forestry operation that is not an RFA forestry operation undertaken in accordance with an RFA, would require approval under the EPBC Act if it is likely to have a significant impact on a matter of national environmental significance, or Commonwealth land.
2 Export Control Act 1982
In the National Forest Policy Statement (NFPS, 1992) the Australian Government committed to remove export controls on plantation wood, subject to the satisfactory application of Codes of Practice to protect environmental values.
CSIRO assessed Codes of Practice against ‘Forest Practices Related to Wood Production in Plantations: National Principles (National Plantation Principles)’ agreed by the Australian Government, States and Territories. The removal of export controls recognised the objective of treating plantations as long rotation agricultural crops, and met the aim of treating exports of plantation wood in a manner equivalent to other agricultural exports. The removal of export controls on plantation wood also recognised that the Australian forest industry operates in an international environment.
Following CSIRO assessment, the Australian Government has now approved Codes of Practice (or guidelines, in the case of South Australia) and consequently removed export controls on plantation wood in all States and Territories except Queensland where a Code of Practice is still in development
3 Taxation and Corporations Law – overview related to plantations
The tax treatment of plantations causes considerable confusion for stakeholders both within and external to the plantation timber industry.
Plantation establishment costs are legitimate, tax-deductible business expenses, incurred in the process of taxpayers producing assessable income. However, recent (2007) changes under the Income Tax Assessment Act 1997 (ITAA) mean that the treatment of MIS and non-MIS plantation growers now differ.
MIS Plantation Growers
Under the Managed Investment Scheme plantation model, investors (“growers”) pay a lease and management fee to a contracted plantation manager via a Product Disclosure Statement (PDS) to carry on a primary production business on the grower’s behalf.
The Australian Securities and Investments Commission regulates the PDS under the Managed Investments Act 1998, and ASIC policy statement PS 170: Prospective Financial Information; which applies to forward-looking statements in PDS documents.
The plantation management company pays tax on its profits from the grower’s subscriptions under the PDS, and when the plantation matures, growers pay tax on the assessable income derived from harvest proceeds. As the grower’s initial (non-capital) expenditure is incurred in producing assessable income, these plantation costs are legitimate deductible business expenses.
In 2007, a new Statutory Deduction under Division 394 of the ITAA was implemented for MIS forestry investors, meaning that they no longer had to prove they were 'carrying on a business' (as is still the case for non-MIS forestry investors). However, a new 'Direct Forestry Expenditure' (DFE) test was introduced requiring at least 70% of investor funds to be spent on plantation establshment and management. as opposed to financial adviser commissions, marketing costs and general overheads - media release DFE test (PDF).
Also under Division 394, the previous 12-month prepayment rule for the MIS investment model has become and 18-month prepayment rule and means that plantation managers can secure subscriptions from growers, and have a 18-month period to conduct ‘seasonally dependent agronomic activities’ (as defined in Draft Taxation Determination TD 2002/D4) for which growers have claimed a deduction in the current financial year. This also allows the ATO to collect tax revenue from plantation management companies in the year growers claim the tax deduction.
An up-to-date overview of MIS taxation arrangements can be found in the following article - MIS tax article (PDF), and a comparison of the taxation treatment for MIS forestry investors, non-MIS forestry investors, farm businesses and MIS firms can be found here - Tax comparison (PDF)
Non-MIS Plantation Growers
Non-MIS plantation investors are subject to the General Business Deduction under section 8-1 of the ITAA.
Given the long lead-time between establishment and harvesting, grower’s deductions become losses against other income. This means that growers, who are conducting a primary production business, must pass one of four tests of commerciality, or be granted the Commissioner’s discretion under the ATO’s ‘non-commercial loss’ provisions. This may be granted for a business activity that has a lead time between incurring expenditure and passing one of the commerciality tests (or making a profit for tax purposes), in a period that is commercially viable for the industry in question.
Impediments to plantation development remain within the taxation system. These include
- The capital gains tax anomaly penalising the use of profits á prendre as a means of granting a forest harvesting right;
- The “period inequity” resulting from long periods between incurring costs (planting, management) and receiving income (harvest). This results in growers receiving income in large “lumps”, and being taxed proportionally higher than other agricultural enterprises;
- The inability to use the Australian’s farm management deposit scheme to average forestry income (particularly for plantation growers who are not full-time farmers).
The following section discusses this impediment specifically.
4. Trading in immature plantations
This situation has been significantly improved for MIS plantation growers under the new statutory deduction (Div 394 of the ITAA).
These investors can now trade out of their investment after four years and retain their deductions (previously, they were required to remain in the investment until final harvest). It is expected that this change will create a more liquid market in immature plantation trading, and will lead to increased investment in longer-rotation sawlog projects to fill looming sawlog supply gaps to Australian processors.
Currently, if a non-MIS plantation grower intends to establish a plantation with the intention of selling this prior to final harvest, the grower is ineligible for a tax deduction for the business expenses incurred in establishing and managing the plantation.
These costs must be carried until such time as income is generated, at which time (uninflated), they can be used to offset income derived. This creates a substantial disincentive or market failure, which requires addressing.
