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Australian Tax Breaks For Forestry Investment Under Attack

Friday, February 12, 2010

Australia’s Assistant Treasurer, Nick Sherry, has welcomed the introduction into parliament of a tax reform bill which includes a measure to protect investors in recently-collapsed forestry managed investment schemes (MIS).

Four-year holding rules were introduced in 2007 as part of a package to regulate secondary trading of forestry interests. It is a requirement that an investor has held an interest in an MIS for four years as a condition of an up-front tax deduction.

The government had previously announced that it was aware that the collapse, in 2009, of MISs managed by Timbercorp and Great Southern could be expected to lead to a number of forestry MISs being wound up or restructured. That could cause investors to fail the four-year holding rules.

"With this measure, the government is protecting around 19,000 investors in collapsed forestry managed investment schemes from an unintended adverse tax outcome," Sherry said.

The draft legislation amends the four-year rule to allow an investor's deduction to stand if a capital gains tax (CGT) event happens because of circumstances outside the initial investor's control, and the initial investor could not have reasonably foreseen this CGT event happening, at the time they acquired the forestry interest. The rule applies to CGT events from July 1, 2007, and the amendments in the legislation before parliament will take effect from that date.

This measure to protect the tax breaks for forestry MIS comes at a time when they have been criticised recently for costing around AUD1bn (USD890m) over the five years ending 2008 and reducing the land and water available to food growing.

New research from an Australian National University economist, Judith Ajani, suggests that, “far from being an attractive investment proposition, plantation managed investment schemes are high cost to both the government and investors.” Her study includes evidence that many investors may recoup just 25% of their funds.

She estimates that “government assistance to forestry and logging is equivalent to 42% of the industry’s unassisted value added. Tax-based subsidies through plantation managed investment schemes are estimated to make up 77% of the assistance.

“Assistance to forestry is substantial, especially when compared to assistance to food growers competing for agricultural land and water,” she added. “The Productivity Commission estimated that assistance to grain, sheep and beef growers, which includes drought related payments, was equivalent to 7.2% of the industry’s unassisted value added in 2008.”

This contrasts with the conclusions of a parliamentary committee in September last year that, from a forestry MIS perspective, tax deductibility is an important component of the industry’s development strategy. However, that committee formed its opinion after accepting the official strategy that Australia's plantation timber output should be trebled by 2020 to meet future paper demand.

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