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15 May, 2019

Forestry Farming - The Tax Considerations

Declan McEvoy, our Head of Tax, discusses the important tax considerations when venturing into forestry. Article first published in Forestry & Energy Review, Volume 9 Issue 1, Spring/Summer 2019

Coillte estimates that Ireland’s forestry industry will double in size over the next 10 years. Currently, around 731,650 ha or 10.5 percent of total land area is forest. Set out below are the main taxes forestry farmers need to be aware of.

Income Tax

If you are a landowner who has planted trees and managed them on a commercial basis, you may be exempt from income tax on your profits, subject to satisfying certain conditions. This is because profits or gains from the occupation of woodland which is managed on a commercial basis with a view to a profit are exempt from income tax and corporation tax (but not USC and PRSI). The exemption applies to profit from the sale of trees, whether standing or felled, and whether cut up or not, however you will need to be able to show evidence of operating on a commercial basis. Note that since these profits are exempt from income tax, if you incur a loss when woodland expenses are deducted in any given year, you cannot offset this loss against other income.

Capital Gains Tax

As an individual landowner, if you dispose of woodlands, the amount you receive for the sale of trees growing on your land is excluded from any chargeable gain for capital gains tax purposes. In other words, where land is sold with timber standing on it, the gain from the land is liable to CGT but the gain from the timber is exempt. This exemption does not apply to companies.

Relevant Contracts Tax

RCT is a withholding tax that applies to payments by principal contractors to subcontractors in certain industries, including forestry. This means that if you engage a subcontractor to carry out forestry activities, you will need to register with Revenue as a principal contractor and deduct tax from your subcontractor. The relevant deduction depends on the subcontractor’s tax status. It can be 0 percent, 20 percent or 35 percent.

Stamp Duty

Sales and transfers of land are liable to stamp duty, however the trees growing on commercial woodland are exempt provided that the woodland occupies a substantial part of the land (not less than 75 percent) and is managed on a commercial basis. This means that any sale of forested land has to be apportioned for stamp duty as the land is liable to stamp duty and the crop is not.

Capital Acquisitions Tax

Capital acquisitions tax is a tax on gifts and inheritances. You can receive gifts and inheritances up to a set value over your lifetime tax free. Once due, CAT is currently charged at 33 percent. Where you inherit or receive a gift of agricultural property, you may qualify for Agricultural Relief if you meet certain requirements. This is a substantial relief which reduces the taxable value of agricultural property by 90 percent for CAT purposes. Agricultural property is defined as agricultural land, pasture and woodlands situated in a member state and the crops, trees and underwood growing on such land.

Usually, to claim agricultural relief, you must pass the so-called ‘farmer test’ however this does not always apply if the agricultural property consists solely of trees and underwood. Revenue will take into account whether the woodlands are operated on commercial basis with a view to the realisation of profits when deciding whether the relief is due. Note that there may be a need to split the value of the gift/inheritance between the growing trees and the land. Business relief may be available if you manage the forestry on a commercial basis.

Agricultural relief can be clawed back if you sell land received by way of gift or inheritance within six years or if you no longer meet the conditions for the relief. These clawback provisions do not apply to trees or underwood but they do apply to the land on which the trees are growing.

VAT

For VAT purposes, forestry is deemed to be a farming activity. If you are not registered for VAT, you will need to apply the 5.4 percent VAT addition when selling timber to a VAT registered trader. This should be kept in mind when agreeing a price with the timber merchant. If you are not VAT-registered, you can claim the 5.4 percent flat-rate refund on certain fixed capital costs, such as fencing and roadways (but not planting). Claims are submitted to Revenue via the VAT 58 form.

If you are VAT-registered, you must charge VAT at 23 percent on timber sales apart from fire wood, which is chargeable at 13.5 percent.

Seek advice

While Ireland’s private afforestation has increased steadily since the 1980s, there is still considerable scope for development in the forestry sector. This short article touches on the main taxes forestry farmers need to be aware of however individual circumstances vary and it is always advisable to seek your accountant’s advice on your particular situation.