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

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?

Advertisements

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

  1. eitg says:

    This post is interesting as many millions of post 1989 NZU units have been sold with no regard to risk. The post identifies this risk very well.

    More on the subject can be found in the EITG forest owners guide to emissions trading in the NZETS http://bit.ly/forestownersguidetonzets

  2. eitg says:

    The carbon monitor July 2010 edition covers some modelling by Canterbury University School of Forestry on land expectation value and the sensitivity based on projected increases in the price of NZU units over time

  3. Pete says:

    Hey we have still got the land when we have done with the carbon and rotations of forest. Perhaps the University types intellectualise things to much.
    A man who owns 400 ha of drystock farm has to work full time and more to pull a net income thats a very poor return on investment. Yet he still desires to own it regardless of value. Should he take the 650 units ha for 20 years that equates to $650/ha per annum or $260,000 for his 400 ha at 20 bucks a unit. If we look at a historical return from your average drystock farm its possibly around this mark, more or less. Last year much less, this year perhaps a bit more.
    Hey he can go fishing or even if he’s feeling bad about it, get another job and earn some easy money working for someone else!
    His land still keeps growing in value with inflation and its a good bank to borrow against (to buy another building perhaps or a golf course). This way the “family farm” is retained for the whole family to enjoy without “the farming child” having to work those long wet days and the fine ones also.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: