Are Single Age Class forest owners ‘silly fools’ if they sell their NZU units

March 9, 2011

So…… we sell our nzu’s and they are taxed in the year of income.

Lets assume a 400ha forest of 10 years age, 10,000 units at $20… could be around $60,000 tax. $140,000 to invest someplace else, say a 2.5 million dollar building in the city,complete with 20 year mortgage leveraged against rental and the income from more sales of nzu’s…..

the rough guide for returns of commercial property is equal to inflation over a long period (60 years to 1989)….

Onwards 20 years and the forest now has a  liability of surrendering the units sold by that “silly fool” who sold them all, against all advice from every forest person he talked to ever.

The question is will his building now be worth the balance between surrender value of his units plus his log harvest less the residue units or “free units” as in forestry jargon.

Historically forestry had a 3% above inflation compared to -3% for drystock farming return for the 60 years (sharemarket in NZ was 7% for the curious) preceding the 1989 article the writer read and made the decision to invest in forestry when he could.

at harvest the logs should return more dollars than the NZU that have to be surrendered. if not the prudent forest owner will leave the trees growing…. until they are. Just look at the turnaround in the last 3 years from doom and gloom to the highest log prices since the 1991 spike. Trees don’t mind being 33 years old!

however the building is now freehold and available for sale at capital gain….

the large surrender value of 20 years of sales of NZU is fully tax deductible expense, just as the harvest cost is deductible. 260,000 * 30% residue – =182,000 units to be surrendered at say $70 $1,274,000 remember the tax deduction against income

who among you followers of forestry are prepared to do the numbers and stop suggesting and advising forest owners with one age class to plant more forest to offset liability. how many eggs do you put in one basket?