Friday, 19 August 2005

The land grab

Dear Members of Parliament

As you probably know Great Southern Plantations Limited have now joined the land grab by forest operations companies in Tasmania and are now paying $5000 per hectare. Only the prime cropping and dairying properties are outside their grasp at this stage. What happens when milk prices take a dive and/or vegetable growers suffer another blow before they have a chance to get off the canvas? It may be too late to act at that stage.

Much of the debate on the taxation of plantation forestry shows little understanding of all the issues and has focused mainly on the 12 month prepayment rule whereas the more crucial issue is that expenditure on tree establishment is immediately deductible compared to say expenditure on planting an orchard which is written off over the effective lives of the orchard trees. I’m sure you’ll agree that this seems a little unfair and likely to lead to sub optimal resource allocation decisions.

I realize income tax is the province of the Federal legislature but it is important to understand how trees are treated under Federal income tax laws before I cover a couple of State taxation issues. I will be grateful if you can read the attached short submission which I have just made to the Federal Review of Taxation of Plantation Forestry in which I point out that different trees attract different tax treatments, ranging from an immediate write off for plantation trees, to a write off over the effective lives for horticultural species, to nil deductions for trees involved in carbon sequestration projects.

It’s a cop out to glibly state that the growth in forest operations companies is just another example of the market at work. It is not. It is another example of how anomalies in the Tax Act can produce unsatisfactory resource allocation outcomes. My suggestion is to require plantation establishment costs be written off in a similar way to expenses incurred in the establishment of a horticultural crop. In the case of a eucalyptus nitens plantation with an effective life of 15 years it should be allowed a write off of 13% per annum.

Another issue in the broad debate about plantation forestry is whether plantation growers pay their fair share of municipal rates. The Valuation of Land Act 2000 defines land in Section 3 to include plantations and all trees and timber on land. But when one looks at the duty of the Valuer General in section 11(7) one discovers where land is used primarily and effectively for growing trees to be cut for commercial or industrial uses, in the case of an artificially established plantation of not less than one hectare, the value of the trees is not included in the value. How fair is that? Once again we are allowing the traditional distinction between different types of trees that emanates from olde English case law (see my submission to the Federal review) to affect how we value land. What nonsense! Fruit growers and those growing trees as part of a carbon sequestration project have their trees included in the value of their land and pay municipal rates accordingly, but not plantation growers. The latter have, in a lot of cases, removed unwanted houses and other capital improvements thereby reducing the capital value of their properties, and replaced them with plantation trees which aren’t included in the land value. How good is that? Not to mention the negative externalities produced by forest plantation companies by way of extra use of scarce water resources and extra wear and tear on country roads. And we give them a discount on their rates. It’s a crazy world. Little wonder they keep lining up to buy more of our land. Compare this, for instance to all the obstacles faced by a dairy farmer who wishes to use additional scarce community water to irrigate his pastures.

A simple amendment to the Valuation of Land Act would soon fix the problem and restore, as economists would say, a little more horizontal equity between ratepayers. And if valuers have trouble valuing trees, then let them start with the rosy projections contained in the managed investment scheme (MIS) product disclosure documents which presumably all investors would have read and accepted before agreeing to invest. And maybe if some of the product disclosure claims came under a little more scrutiny by professional valuers then some of the suspect projections might be revised downwards which would in turn lead to a fall in demand for trees by investors—a sort of self correcting market mechanism that occurs when the market has more and better information.

The Land Tax Act 2000 covers land tax. An exemption is granted to primary production land. Arguably the reason for the exemption is that farmers hold a disproportionately high percentage of their assets in the form of land compared to other businesses and to tax them would be inequitable (ie resulting in horizontal inequity between business taxpayers). I’m sure the exemption would not have been granted had the only beneficiaries been high marginal rate taxpayers from Sydney’s North Shore seeking tax relief by buying trees in Tasmania. They are investors and should pay the General rate of land tax. They are primary producers in only a narrow legalistic sense. A simple amendment could exclude land used by MIS companies from the definition of primary production land in section 7 of the Act.

My aim in writing to you is to try to explain the situation from my viewpoint as a economist and a tax practitioner. Hopefully people of all political persuasions can find common ground and move rapidly to take fair and reasonable steps to ward off potential disaster that awaits us if large tracts of Tasmania continue to be gobbled up by forest operation companies. As I said at the outset land is now being bought at $5000 per hectare. If trees are planted at a cost of $4000 per hectare and the woodlots (ie trees only) are sold to investors at $10000 per hectare, forest operations companies are left with unencumbered land on their balance sheets plus a crop of trees (off balance sheet) which they control and it hasn’t cost them a penny, having been paid for principally by mainland investors disinterested in the actual business of growing trees, motivated only by tax savings, oblivious or perhaps just negligently neglectful of the resultant social dislocation, water shortages. public health problems and planning disasters that are being thrust on the people of Tasmania, and all this subsidized by you and I, the taxpayers of Australia. It’s got to be better than this

Please talk to your colleagues. The solutions aren’t difficult. I’m only suggesting restoring a little more equity to the system, not the reverse. I’m not suggesting we marginalize or discriminate against a section of our community. I’m yet to encounter any serious counter arguments from the people to whom I’ve spoken.

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