For farmers, forestry and commercial woodland can help to diversify farm income and there are valuable tax incentives available, provided you operate on a commercial basis with a view to realising a profit. Around 11 percent of Ireland’s land area is currently under forestry, with over 75% of timber processing output and 80% of wood based panels going to export markets.
Income Tax
Where a land owner manages woodlands on a commercial basis, the profits are exempt from Income Tax. This exemption applies to profits arising from the sale of standing or felled trees by the land owner who planted them. To avail of the exemption, you must be able to provide evidence of managing the trees on a commercial basis.
Of course, profit may not be made every year. In certain situations, when woodland expenses are deducted, you may incur a loss. Since profits are exempt from income tax, this loss cannot be offset against other income for the year in question.
In the past, a high earner restriction limiting the use of tax reliefs and exemptions by high income individuals applied to forestry and woodland profits however this restriction was removed with effect from 2016.
Profits or losses from forestry income must be included on your annual income tax return.
PRSI and USC
Although potentially exempt from income tax, your profits from forestry will be liable to PRSI and the Universal Social Charge.
Relevant Contracts Tax
Another tax to be aware of is Relevant Contract Tax. RCT is a withholding tax which applies to certain payments made by principal contractors to subcontractors in the forestry industry.
You are a principal contractor if you use a subcontractor to carry out activities on your behalf but engaging a company to plant land does not make you a principle contractor unless you are also undertaking forestry operations yourself.
Principal contractors are obliged to register with Revenue and deduct tax from sub-contractors. The relevant deduction can be 0%, 20%, 35% depending on the tax status of the subcontractor.
Capital Gains Tax
For individual taxpayers, the gains that you make from the sale of trees growing on your land are excluded from CGT. If you sell land with timber standing on it, the trees are not taken into account for CGT however you will still be liable for CGT on the sale of the land. This exemption from CGT does not apply to companies.
Stamp Duty
Where you sell forested land, the trees growing on the land are not liable for Stamp Duty however the sale of the underlying land is subject to Stamp Duty at the rate of 2 percent. To benefit from this provision, trees must be growing on a substantial part of the land (not less than 75%) and the woodlands must be managed on a commercial basis with a view to the realisation of profits.
Capital Acquisitions Tax
You may receive gifts and inheritances up to a set value over your lifetime before having to pay Capital Acquisitions Tax. CAT becomes chargeable at 33% once you exceed the relevant threshold.
Where you inherit or receive a gift of agricultural property, you may qualify for Agricultural Relief. This is a valuable relief which reduces the taxable value of the property, including land, by 90%.
For CAT purposes, agricultural property is defined as agricultural land, pasture and woodlands situated in a EU member state and the crops, trees and underwood growing on such land.
In general, you can claim Agricultural Relief if you receive a gift or inheritance of agricultural property and you qualify as a farmer.
To qualify as a farmer, the value of your agricultural property must make up 80% of your total property value on the valuation date. This is called 'The Farmer Test'. (The farmer test does not apply where agricultural property consists only of trees and underwood.)
In addition, the person receiving the gift or inheritance, or the person leasing the property must either have an agricultural qualification or farm the agricultural property for at least 50% of his or her normal working hours. However Revenue guidance states that, in exceptional situations, if it can be shown that, on an on-going basis, certain farming activities, e.g. farming involving the occupation of woodlands on a commercial basis, are carried out on a commercial basis and with a view to the realisation of profits, but do not require 50% of normal working time / 20 hours per week to be spent on such farming activities, Revenue will take this into consideration in deciding whether the relief is due.
Keep in mind that land is subject to the Agricultural Relief asset test. Therefore, there may be a need to split the value of the gift/inheritance between the trees growing on the land and the land itself.
Agricultural Relief can be withdrawn or clawed back in certain circumstances. The claw-back provisions do not apply to the trees or underwood but do apply to the land on which they are growing.
VAT
For VAT purposes, forestry is deemed to be a farming activity.
Forest owners who are not registered for VAT may be able to recover VAT on fixed capital costs such as fencing and roadways (but not the cost of planting) under the scheme for repayment to VAT unregistered farmers (VAT 58 Form).
Keep in mind that if you are not registered for VAT, you will need to add VAT at the flat rate of 5.4% to your sales to compensate for the VAT paid on your costs. For example, the supply of timber to a VAT registered trader would attract a flat rate addition. It is important to keep this in mind when agreeing a price with a timber merchant.
If you are registered for VAT, you will need to charge VAT at 23% on timber sales. VAT on fire wood is chargeable at 13.5%.
Conclusion
The tax exemptions outlined in this short article are potentially valuable for farmers engaged in commercial forestry and woodland operations, however it is important to be aware of and comply with the relevant rules and conditions. As is always the case, it is advisable to discuss your individual circumstances with your accountant and seek advice on how to maximise the potential savings for your business