Article on Woodland Tax Relief
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Cash in on woodland tax relief incentives
Managing forestry so that you maximise the benefits
There are certain tax incentives in place where the managing of forestry or woodlands is carried out on a commercial basis, namely an income tax exemption on profits arising from forestry operations, a capital gains tax exemption on the sale of timber and a partial stamp duty relief on any forestry land.
Income Tax Exemption
Profits or gains arising from the occupation of woodlands managed on a commercial basis, and with a view to the realisation of profits, are not to be taken into account for any purpose of the tax acts.
The tax-free status of income is further preserved when dividends from companies are paid out of such exempted income.
Losses incurred in the occupation of woodlands managed on a commercial basis with a view to the realisation of profits may not be used to shelter a person’s other income from tax. Any profits,gains or losses arising from forestry activities must be included in the taxpayer’s annual return of income, even though the income or gains are exempt from tax.
The normal rules relating to the keeping of records and the making available of such records for inspection by the Revenue also apply.
High-Income Earners
Tax relief in respect of income from forestry is restricted in the context of the limitation on the amount of certain reliefs used by certain high-income individuals. Broadly, where a person is a high-income individual, they are restricted in the extent to which ‘specified reliefs’ can be applied to reduce the individual’s tax bill. The provision works so that the ‘specified reliefs’ used in any one year are limited to 20pc of the individual’s ‘adjusted income’. If a person has other income, then the amount of the forestry exemption will be limited to the greater of €80,000 and 20pc of the total income. However, if your total income is under €125,000, the forestry income will not be caught by the high-income earners’ restriction.
Capital Gains Tax (CGT)
Capital gains arising on the sale of standing timber is exempt from CGT in the hands of the individual. The relief does not apply to companies, or other bodies of persons. Where land is sold with standing timber on it, the proceeds must be apportioned and the part of the proceeds referable to standing timber excluded from the computation in relation to the disposal of the land.
Capital Acquisitions Tax
Gifts or inheritances of woodlands within Ireland can qualify for agricultural relief. Agricultural relief is a relief from CAT and takes the form of a flat rate 90pc reduction in the market value of all agricultural property comprised in a gift or inheritance, provided that the donee meets the ‘farmer test’ so that 80pc of the donee’s assets consist — after taking the relevant gift or inheritance — of agricultural property.
Trees and underwood growing on the agricultural land in question are specifically included in the definition of agricultural property, provided that they are growing on the land.
Crops or trees that have been harvested or cut down would not therefore qualify for relief. The timing of gifts or inheritances to take account of harvesting of valuable crops or felling of significant tracts of forestry should therefore be considered if passing onto the next generation.
Stamp duty on Forestry
There is a partial relief from stamp duty in respect of certain instruments relating to the sale or lease of land on which ‘trees’ are growing.
The partial relief is given by providing that the value of any trees growing on the land at the time the land is sold or leased will not be taken into account if:
- The trees are being managed on a commercial basis with a view to making a profit;
- The trees are growing on a substantial part of the land;
- The instrument contains a certificate to such effect.
Conclusion
There are numerous tax incentives in place where managing of forestry or woodlands is carried out on a commercial basis. It is worth reviewing the tax consequences of any transactions undertaken with your accountant or tax adviser to ensure that all reliefs are being availed of and that all the necessary documentation is in place.
Mark Doyle is a tax director at Grant Thornton
Contact Mark
Capital allowances and loss relief for farmers
Capital expenditure relief is available to farmers in various forms, from allowances on plant and machinery, milk quotas and farm pollution control measures to farm buildings.
Farm Buildings Allowances
Farmers may claim a farm buildings allowance for capital expenditure incurred on the construction of farm buildings. The farm buildings allowance is calculated on a straight line basis at a rate of 15pc for six years and 10pc in year seven. Bear in mind that the relief available is calculated net of any grants received. Farm buildings allowances are available in respect of farm buildings, fences and other works such as roadways, holding yards, drains and land reclamation.
Plant and Machinery
In order that a farmer may claim capital allowances on plant and machinery, the plant and machinery must be used for the purposes of the farming business. Capital allowances are granted at a rate of 12.5pc on a straight-line basis per year for eight years only. Balancing allowances or charges may arise for the farmer where assets are disposed of which have previously qualified for capital allowances. Balancing charges do not arise where the proceeds on the disposal of an individual asset are less than €2,000, although this will not apply to disposals between connected persons.
Milk Quotas
Capital allowances are available to farmers in respect of expenditure incurred on or after April 6, 2000, on the purchase of any qualifying milk quota. The amount of expenditure which qualifies for relief is subject to maximum price restrictions which have been set by the Minister for Agriculture, Fisheries and Food. Capital allowances are not available to farmers who lease out their quota. The allowances are granted on a straight-line basis over a seven-year period. Where the milk quota is subsequently sold, a balancing charge or a balancing allowance will arise, which is calculated by reference to the proceeds and the tax written-down value of the quota at the date of sale.
Pollution Control
Farm pollution control accelerated allowances are available to a farmer who has a farm nutrient management plan in place. It grants capital allowances over the shortened time period of three years. The relief applies to expenditure incurred on or after April 6, 1997 and before last January 1. The Minister for Finance has not renewed the scheme for farmers who incur capital expenditure with effect from January 1, 2011.
The consequence of this is that such investments post 2010 in farm pollution control will have to be written off over seven years compared to three years under the accelerated allowance scheme.
Loss Relief for Farmers
Loss relief is available for farmers in that the losses can be carried forward and offset against future profits from the same enterprise. Relief is also available for offsetting against other income, such as salaries and investment income, subject to certain conditions. This could possibly result in a refund of PAYE tax or a reduction of the tax on investment income.
However, the catch is that the farm enterprise must be “carried on, on a commercial basis and with a view to the realisation of profits”. Furthermore, relief cannot be claimed if a loss was incurred in each of the three previous years of assessment. Relief is not restricted where the loss has been created by using capital allowances. Similarly, for the “three-year” loss test, losses created by capital allowances are disregarded. There may be exceptional circumstances in which losses for four years are necessary in order to build up an efficient farm. In such circumstances, loss relief against other income may be claimed for a fourth year if the farmer can show:
- That his trading activities are of such a nature, and carried on in such a way, that if undertaken competently, they would give rise to a reasonable expectation of future profits;
And
- That the business could not reasonably have been expected to become profitable until after the fourth year.
Where a farmer carrying on a farming trade sustains a loss and all of the loss relief is not used against other income, there is no restriction on carrying those remaining losses forward against subsequent profits from the same farming trade.
This article first appeared in the Irish Independent, Tuesday April 12 2011 Click here to read original article
Tax Losses
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The tax treatment of Case I, Case II, Case V, and capital losses are areas that will require the attention of many accountants in the coming months as the income tax filing deadline approaches. This review does not deal with the tax treatment of specified reliefs as they only impact a minority of high income individuals.
Case I losses
At the outset, it is worth noting the changes made in the Supplementary Budget to the taxation of persons engaged in dealing in, or developing, residential development land. The 20% income tax rate for dealing in, or developing, residential land was abolished. With effect from 1 January 2009, all profits will now be taxed at the marginal rate. For all tax returns submitted after 7 April 2009 (e.g. income tax returns up to and including 2008), residential land losses will generally only be relievable (on a value basis) up to a maximum of 20%. Losses forward from previous years will also be treated on a value basis. This represents a dangerous precedent in our tax system as it is effectively introducing retrospective taxation.
Where an individual has an accounting year ended say 31 March 2009, all the profits from residential land will be subject to the higher rate of tax. This differs somewhat from the tax treatment of companies: where companies have an accounting period straddling the year end, they will be treated as having two tax periods in their accounting year.
S381 TCA 1997 allows a person to offset losses from a trade, profession or employment against, firstly, other income of the individual (e.g. rents, dividends, employment income) or, in a case where the individual is married, against the income of their spouse. The losses of a trade are to be computed in the same manner as profits. Capital allowances can be used to create or augment a loss.
Any claim for relief under S381 TCA 1997 must be made within two years of the end of the year of assessment.
S382 TCA 1997 allows a person to carry forward excess losses from a trade or profession not already utilised under S381 TCA 1997 to future years, to offset against profits of the same trade or profession. It is not possible to offset losses carried forward against, say, investment income or employment income. Relief under S382 TCA 1997 is to be given against profits of the first year of assessment. It is not possible to carry losses forward and save them for a period in which income would be taxable at the marginal rates (41%), rather than only use them against income in an earlier period taxable at the standard rate (20%). Losses forward cannot be offset between spouses.
There are specific provisions relating to losses arising from a farming trade. Where a farmer incurs losses for three consecutive periods, any losses arising in the fourth period can only be carried forward to offset against future profits of the same farming trade and cannot be offset against other income under S381 TCA 1997.
Terminal loss relief is available where a trade or profession is permanently discontinued and the person carrying on the trade has incurred a loss. The relief allows a person to carry back the loss to the three preceding years of assessment, and receive a refund of tax paid on the profits in those periods to the extent that the losses allow. Where there is a cessation of a trade, accountants should be cognisant of the cessation provisions with regard to the change of the prior period to the actual basis of assessment where profits are not already assessed on the actual basis (31 December year end). These rules only apply where taxable profits on the actual basis in the prior year would exceed the profits originally assessed.
In this regard, it is also worth noting the special provisions for short-lived businesses, i.e., where a business commences and ceases within three tax years. Under these provisions, the aggregate taxable profits for the three years of assessment may not exceed the profits actually earned in the period. An election for this treatment must be made before the specified return date for the year of cessation.
Case II losses
Partnership profits and losses are taxed under Case II. The rules relating to loss relief under Case I detailed above apply to Case II with some exceptions. Where a partnership incurs a loss, the loss cannot be apportioned so as to give any partner a profit for tax purposes, irrespective of the provisions of the partnership agreement. Furthermore, loss relief cannot be claimed by the individual partners for more than the total partnership loss. Similarly, where a partnership makes a profit, no partner can claim relief for any loss, nor can partners be taxed on more than the total partnership profits. Different partners may use their share of a partnership loss in different ways for the purposes of relief. For example, one partner might claim relief under S381 TCA 1997, while another might claim to have his/her share of the partnership loss relieved under S382 TCA 1997.
Anti-avoidance legislation exists to prevent the use of losses incurred by certain partners in a partnership under S1013 TCA 1997. The legislation restricts the right of limited partners and general partners, who are not active partners (as defined by S1013 TCA 1997), to offset losses, interest, and capital allowances of the partnership against non-partnership income. The use of losses by non-active partners in a partnership was covered in the article ‘Tax planning in a recession’ in the spring issue of Accounting Matters and may be referred to for guidance.
Case V losses
S384 TCA 1997 deals with Case V losses. Case V losses are those arising from Irish rents, and are specifically described as: “the aggregate of the deficiencies computed in accordance with S97 TCA 1997 which exceed the aggregate of the surpluses as so computed”. This can be taken as meaning the excess of rental expenditure over rental income.
All Case V income is treated as arising from one source, therefore where there are a number of let properties, losses arising on one property may be netted against profits arising on another property. There is no provision in tax law where Case V losses incurred by one spouse may be set against the profits of the other spouse. This contrasts with excess capital allowances, which are specifically provided for under S305 TCA 1997. Although historically, some tax districts allowed the set-off of losses, Revenue are of the view that they are precluded by the legislation from granting the set-off. However, Revenue may be issuing some guidance reaffirming this position in the coming months. S305 TCA 1997 provides that Case V income is reduced by capital allowances forward in priority to current year capital allowances. Accordingly, this would increase the amount of current year capital allowances available to set against total income.
Losses carried forward are to be deducted from the profits on which the person is assessed under Case V. The argument is that capital allowances are made in charging the income and, therefore, it is only the assessed profits, i.e., after capital allowances, which fall to be relieved in the computation.
Consequently, losses carried forward are the last in the sequence to be relieved. The Revenue view is that Case V losses carried forward are available for offset against the Case V income after capital allowances (carried forward and current year). The alternative view is that the losses carried forward should be set against the current year Case V income in priority to capital allowances. The legislation is far from clear in this area and is open to interpretation.
Capital gains tax losses
A loss is calculated in the same manner as a gain. The same rules apply as to the consideration chargeable and the expenditure allowable. There are, however, restrictions on the use of indexation in computing a loss, and also in computing a loss on certain non-wasting chattels. Indexation is still available for expenditure incurred prior to 2003. It cannot be used to either create or increase a loss. If a gain on the disposal of an asset would not be chargeable, then a loss arising on the disposal of that asset is not allowable. In addition, where the person making the disposal is an individual, and is not domiciled in Ireland, any losses accruing to him on the disposal of assets situated outside Ireland are not allowable losses for capital gains tax purposes whether the proceeds of sale are remitted into Ireland or not.
Unused capital gains tax losses are carried forward and must be set off in the next earliest possible year against any net gains of that year, and any unused balance carried forward to the next year, until all losses forward are used up against gains of those future years. In any year, losses may be set against gains liable at the highest rate of tax.
Except in the case of a capital gains tax loss arising to an individual in the year of his or her death, relief by way of set-off of a loss against chargeable gains cannot be given for a year of assessment earlier than the year of assessment in which the loss actually arose.
In the case of a married couple, surplus losses of one spouse may be set against gains of the other spouse. Terminal loss relief is available to the personal representatives of a deceased person. The deceased’s allowable capital losses which arise in the year of death may be set against pre-death capital gains of that year and any excess may be set back against the chargeable gains for the three years of assessment before the year of assessment in which he or she dies. Terminal loss relief only applies to the excess losses after chargeable gains of the year of death are sheltered. Terminal losses must be set against later gains first, before setting them back against gains of earlier years.
Care should be taken when dealing with losses arising on disposals to connected parties, or losses that are crystallised on share portfolios. Again, this issue was covered in the article ‘Tax planning in a recession’ in the spring issue of Accounting Matters and may be referred to for guidance.
Article on Tax Planning in a Recession
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It is full steam ahead for the Irish recession. Asset values have fallen significantly with no immediate prospects for recovery; cash is tight; and many businesses are beginning to feel the pinch. Every cloud has a silver lining and this is the perfect opportunity to take stock of your tax position and take advantage of the country’s current predicament.
Capital Gains Tax losses
Share prices have taken a battering in recent months. It appears that the fall in value is here to stay for the foreseeable future. It is worth considering locking in losses at this point so as to crystallise the tax value of the losses. This might be done to make the loss available against current year gains or for use against future gains. Where there is no prospect of future gains in the shares, it may well be simple to crystallise the loss. Difficulty arises when the share is expected to increase in value in the short term or where there is difficulty selling the shares as they have become de-listed (e.g. Anglo Irish Bank).
While advising a client on crystallising losses, practitioners should be aware of the following:
- The ‘bed and breakfast’ provisions contained in S581 TCA 1997;
- The restriction in connected persons losses in S549 TCA 1997; and,
- That certain investments listed in a portfolio may be funds the losses on which are not available against capital gains.
With clever structuring, it may be possible to unlock the losses contained in an asset, while still maintaining control of that asset. It is also worth considering the provisions in S238 TCA 1997 pertaining to negligible value claims. This section provides loss relief where the owner of an asset satisfies the inspector that its value has become negligible. The loss is calculated as if the asset was sold at an amount equal to its current value. This relief can be useful where there is no ready market for disposing of an asset.
The loss arises not at the date at which the asset lost its value, rather the loss is deemed to arise for tax purposes when the claim for the relief is made to the inspector. It appears that, in practice, Revenue allows, on a concessional basis, a loss that is made within 12 months of the end of the year of assessment for which relief is sought to be admitted, provided that the asset was of negligible value in the period concerned.
Passing assets to the next generation
With reduced asset values, now may be the time to consider passing assets to the next generation. All taxes on gifts (CAT, CGT and Stamp Duty) are based on current market value. Gifting at a low value now should have reduced tax costs and wealth will accrue to the children going forward.
We should see an increased use of trust structures for wealth protection. In recent times, clients became more relaxed about the age at which children get access to family wealth. Recent experience has evidenced that less-experienced investors can lose a lot of money very quickly and clients are now more reluctant to leave assets directly to children. We expect to see more use of the discretionary trust structures that were common place in the past.
Development land losses – individuals and partnerships
Many practitioners are faced with the prospect of finalising accounts for sole traders and partnerships involved in residential land development. This land is likely to be significantly diminished in value. Stock should be valued at the lower of: cost or net realisable value. This is a basic accountancy principle. In this regard, tax losses are likely to arise. The advisor must then consider how to best utilise those losses.
It is worth noting that taxpayers may elect not to apply the relief in S644A TCA 1997, which applies the 20% tax rate to profits arising on the sale of residential development land. Any losses then arising on residential land may be used to offset total income arising to the taxpayer in the normal manner. Difficulty can arise where a taxpayer has profits in one land development trade and losses in another; in this case, if the election is made for S644A TCA 1997 not to apply, then the profits from dealing in land will be taxable at the marginal rate. It could be argued that the provisions of S644A TCA 1997 apply only to ‘profits or gains’ and, thus, have no impact on losses.
The ability to shelter other income from tax by offsetting losses in this manner is a valuable relief for taxpayers, and advisors should be aware of this when preparing tax returns for their clients. Remember to take care when dealing with loss claims as there are a number of pitfalls to avoid.
Mark Doyle is a member of the Capital Taxes team in Grant Thornton. Contact Mark
Capital Gains Tax – A Practitioners Guide
This book, written by Mark Doyle and published by Charted Accountants Ireland is the authoritative text on capital gains tax in Ireland. It examines in detail capital gains tax legislation, Irish and UK case law and Revenue practice.
It offers guidance on practical difficulties encountered in everyday practice and contains numerous worked examples, and describes, where appropriate, steps that may be taken to enhance the tax efficiency of a given situation.
The 2nd edition, updated to and including Finance Act 2015, is now available to buy.
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