NEW ZEALAND : FOREST INVESTMENT INCENTIVES

NB Information given here about the economics and taxation of forestry investments is strictly for general guidance and does not constitute investment or professional advice. Prospective or existing investors are strongly advised to seek professional advice on all aspects of investment in forestry and on its taxation, which is complex.

Foreign Investment In New Zealand

The legislation governing overseas investment in New Zealand was updated in 2005, by the introduction of the Overseas Investment Regulations 2005, and then again, three years later by the Overseas Investment Amendment Regulations, 2008.

Approval by what was the Overseas Investment Commission (OIC), and is now the Overseas Investment Office is required for all foreign direct investment (both acquisitions and greenfield investments), where an "overseas person" is to acquire or take control of "significant" assets in New Zealand. "Control" is defined as 25 percent ownership or a controlling interest of an asset. Significant assets include: businesses or property worth more than a designated amount, NZD 10 million (approximately USD 6.8 million) at the time of writing; land more than five hectares or worth more than NZD 10 million (at time of writing); and certain "sensitive" land more than 0.2 hectares (e.g., on islands, on or next to reserves, historic/heritage areas, foreshores, and lakes).

For investments through partnerships (quite common for forestry) there are no New Zealand Governmental restrictions on foreign investment where the individual’s shares are less than 5% of the partnership. One international investor can hold up to 25% of a partnership without requiring OIO approval. There are no restrictions for non-resident New Zealand citizens.

In practice, the OIO approval requirements have not been an obstacle for forest investment. Refusals have been limited to a few cases in which land was to be devoted to private amenity, with no productive usage.

New Zealand has a history of major forest purchases and sales, going back to the disposal of the government forests in the 1980’s. The sale process has continued with transactions on privately owned forests and rationalizations of the earlier negotiated sales of government forest.

Forests investments are available through a variety of options:

• Purchase of trees and land;
• Purchase of shares in listed companies;
• Purchase of trees only;
• Initiate or take over leases on land and/or trees;
• Joint ventures in existing or greenfield projects

Development Of Forestry In New Zealand

Even by the end of the last century it was obvious that the indigenous wood supply in New Zealand could not last. As a result, the government of the day set up a Royal Commission to look at the future of forestry in New Zealand. The commission strongly recommended the planting of exotic forests and as a consequence, the planting of radiata pine began.

Now there are around 1.8m hectares of exotic forests, with radiata pine accounting for most of it. Hardwood plantation is also available. About 50,000 hectares are newly planted every year. These plantations in 2004 produced approximately 18 million cubic metres of wood per annum. This production is expected to almost treble to more than 40 million cubic metres per annum, with continued replanting, by the year 2020.

In New Zealand it takes between 25 to 30 years for Radiata Pine to reach maturity. It would take between 60 and 300 years to reach the same size in most other countries. Radiata pine has a wide variety of end uses including timber, pulp, plywood and panel products and high quality furniture.

The New Zealand Ministry of Agriculture and Forestry’s latest Situation and Outlook for New Zealand Agriculture and Forestry (SONZAF) report into forestry production says demand for lumber in key markets will grow, and prices, while not spectacular, are expected to grow out during 2007/08. Prices for pulp and paper are, however, predicted to be headed for a cyclical downturn during the outlook period, and a lack of growth in processing capacity is likely to constrain any significant growth in volumes.

The 2007 SONZAF report had this to say with regard to the forestry sector: "International log prices have been improving since late 2006, in part because of the Russian Federation’s decision to progressively increase its log export taxes. This will contribute to a steady rise in international log prices over the forecast period and benefit the forestry sector."

The Economics Of Forestry In New Zealand

A New Zealand forestry investment may be made directly in establishing new forests, acquiring existing semi-mature forests or in wood processing facilities. An investor could also purchase shares in one of several publicly listed forest growing and processing companies. Relatively few opportunities are available to acquire semi-mature forests on attractive terms and most direct investment has focused on buying sheep farms and establishing new plantings.

New Zealand pina radiata cultivation typically generates internal rates of return in the 7% to 11% range. The forestry internal rate of return (IRR) is the equivalent annual return from the project. It is calculated on the assumption that there is no inflation of either costs or prices and is regarded as a "real" return. To compare the forestry IRR to returns on other investments it is necessary to factor in the effects of taxation and inflation.

The precise tax effects of a forestry investment will depend on how its ownership is structured. For investors with other New Zealand income sources, the costs of developing a forest can be deducted for tax purposes. This reduces the impact of taxation on returns relative to investments, which distribute income annually, e.g. bank interest.

In New Zealand, a forestry investment - whether directly managed or managed on behalf of an investor - would normally have the following structure:

• A Manager responsible for day to day running of the investor's business, including: forest and land acquisition; development, maintenance and protection of the forest assets; administration and reporting;
• A Forest Auditor independent of the Forest Manager for the purpose of undertaking periodic checks of the Forest Manager's performance, which are reported directly to the investor;
• A Legal Advisor to provide experienced New Zealand input into setting up an appropriate investment vehicle and to undertake all legal work in relation to the sale and purchase of property;
• An Accountant to prepare periodic books of account to complement the Manager's reporting and arrange for these to be audited.

Normally it will be most effective to purchase and own a forestry investment in New Zealand using a corporate structure. There are a number of local legal firms with extensive experience in establishing overseas companies for forestry investment in New Zealand.

Ownership of local public company shares is another way of investing in New Zealand forestry which might suit some types of investor, although it won't give the most tax-efficient result for most private investors. Private investors can choose between syndication entities, joint or individual ownership. A number of local forestry investment companies offer investments ranging from NZD2,500 to over NZD1,000,000. It's usually possible to buy into existing syndications during the life of a forest, picking a time to suit the needs of individual investors. Unitholders in a syndication arrangement own the underlying land as well as the trees planted on it.

New Zealand Forestry Taxation

The Government does not offer incentives to foreign investors. A stable, low-inflation environment is viewed as the strongest incentive for investment that the Government can provide. There is no capital gains tax. New Zealand has currently concluded double taxation agreements with 34 countries, including the United States.

The rate of corporate tax was reduced from 33% to 30% from April 1, 2008.

For most years during the term of a forestry investment the investor will be entitled to a share of the investment's tax losses corresponding to his percentage involvement. The process for claiming tax losses differs for company based investments and partnership based investments:

• For company-based investments, the loss can be claimed using the section for 'qualifying company losses' found at question 23 in the standard IR3 tax return (or question 17 of an IR6 tax return for Trusts); a loss is claimed in the previous tax year's 31 March tax return, unless an investment has a 30 September balance date, in which case the taxpayer can opt either for previous year or subsequent year treatment
• For partnership-based investments, the loss is claimed in question 17 in the standard IR3 tax return (or question 11 of an IR6 tax return for Trusts). Partnership based investments may also have interest earned and resident withholding tax to declare. This should be recorded in question 13 in the standard IR3 tax return (or question 9 of an IR6 tax return for Trusts).

On the 1st April 2000 the tax rate on individuals' income over $60,000 a year increased from 33 cents in the dollar to 39 cents in the dollar. This was good news to most forestry investors in this tax bracket because the tax losses became worth more. A forestry tax loss of $1,000 translated into a tax refund of $390, up from $330, a $60 or 18% increase.

Investors' harvest returns were also taxed at this higher rate (should this be the applicable marginal tax bracket) as was all other income they earn above $60,000. Overall, the attractiveness of a forestry investment increased at a 39 cents tax rate when compared with other investments.

Under current taxation law, the investment company will pay company tax on the harvest proceeds and the investors will be paid a fully imputed dividend). Provided the investor's marginal tax rate is no more than the dividend tax rate, no further tax will be payable. Those investors on a lesser marginal tax rate who have paid income or other tax, may be entitled to a tax refund.

Non-resident investors will receive their share of the harvest proceeds at harvest as a New Zealand dividend. Under current tax law, the company will have paid 30% company tax, but the dividend will attract a Foreign Investor Tax Credit (FITC), leaving a residual percentage as the non-residents ‘taxable’ dividend.

Dividends payable to non-residents are then subject to Non-Resident Withholding Tax (NRWT) at 15% (at time of writing), leaving a net dividend of 67%. If a non-resident’s only New Zealand income is a forestry investment company dividend, there is no further New Zealand tax liability in respect of this income. NRWT is a final tax and it is not refundable in whole or part. Any other New Zealand losses available to a non-resident (forestry losses carried forward or losses from other sources) cannot be offset against an Investor’s harvest income dividends.