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Debate about forest plantations and tax deductions.



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NATIONAL INTEREST

Sunday, 7 May 2006

 

 

 

PETER MARES: Trees are good and there should be more of them—that goes without saying. Or does it? Over the past few years there has been a boom in plantation timber in Australia, mostly stands of rapidly growing blue gums which after 10 years or so can be turned into woodchips and shipped off to Japan. But there are also major plantings of softwoods like pine that creates sawlogs for industries such as construction and furniture making.

 

Hundreds of millions of dollars have been funnelled into plantations via managed schemes which have the enormous attraction of being 100 per cent tax deductible in the first year of the investment. So if I plonk ten grand into a timber plantation then, presuming I pay enough tax, Peter Costello will give me half that money back again at the end of the financial year and then I’ll get a return on the investment when the trees are harvested. It all sounds almost too good to be true. In the lead-up to Tuesday’s budget there has been some serious lobbying over whether the tax treatment of plantation timber should be changed.

 

To discuss the issue I am joined by three guests. Robert Belcher has been farming the Snowy high country for 20 years, Phil Townsend was until last week CEO of the industry group, Tree Plantations Australia, and Dr Judy Clark is a forestry economist at the Australian National University.

 

Judy, can I start by asking you how these managed investment schemes work? As I understand it, they were the product of something called the ‘20/20 vision’ initiated by former Nationals leader John Anderson in 1997.

 

JUDY CLARK: Yes, Peter, that’s largely right. We had a very large softwood planting program commencing in the mid-1960s and that went on for about three decades. And as you said in your introduction, now softwood plantations supply a very large resource for Australia’s forest industry—essentially 80 per cent of our wood for making sawn timber panels and paper comes from Australia’s softwood plantations.

 

This next wave of planting concerns hardwood plantations. We sometimes call them blue gums or eucalypts and they are plantings that, unlike the softwoods, are largely for woodchip exports—hardwood woodchip exports—managed over short rotations of around 10 years. Typically, the investment is private sector led, as you said. We find that most of that investment occurs with people who are looking for tax minimisation towards the end of the financial year and they are going to their financial advisers and hear about these sorts of investment schemes. They typically invest something of the order of $6,000 or so and usually in the order of about $9,000 a hectare. And as you say, there is a significant tax advantage there; there’s a 100 per cent tax deductibility on those plantations which is immediate and then after that there is an expectation, when that wood comes on to the market in around 10 years, that they will receive a return of around six per cent to seven per cent after tax.

 

PETER MARES: Phil Townsend, the schemes have certainly worked. How much money has gone into plantations in recent years?

 

PHIL TOWNSEND: …over the last 10 years would have collected about $3 billion to invest in the timber plantations and that would be across a range of species—softwoods and hardwoods. In the future we are looking to—and ‘in the future being’ within the next three to four years as the harvesting of those reaches a relatively sustainable level—we are looking at income tax coming back to the government of about $400 million a year.

 

PETER MARES: So that is tax coming back on the profits from harvesting the trees?

 

PHIL TOWNSEND: Yes.

 

PETER MARES: Robert Belcher, you say that plantations are pricing farmers out of the market for land. Why is that?

 

ROBERT BELCHER: Well, anecdotally, I have toured a lot of the areas in Australia affected by plantations and it is the No.1 complaint by people in those areas. But it is not just I saying that it is the farming organisations, it’s the real estate agents et cetera. The subsidy that this amounts to is making anyone else unable to compete on the price of land.

 

PETER MARES: But many farmers are only too keen to leave the land because they are getting old and their kids don’t want to farm any more. This is a boom, isn’t it? I mean, you can sell your land at a really good price.

 

ROBERT BELCHER: Yes, and that’s the emotionally difficult aspect to this because, as a leader of an opposition party said to me, it’s an exit with dignity. And my rejoinder to that was that what’s the future for agriculture and how do young farmers start when they have got to compete against a subsidised price?

 

PETER MARES: Phil Townsend, I am sure you want to dispute this notion that the plantations are subsidised.

 

PHIL TOWNSEND: Yes, it is quite ridiculous the claim that the forest industry is responsible for the large increase in land prices around rural Australia on its own. The Elders people put together a survey over the last couple of years and found that the average land price increase in rural areas was over 60 per cent … the forestry people purchasing three per cent of those properties nationally it’s almost impossible to conceive that we could have that impact.

 

PETER MARES: But presumably, in certain areas where their plantations are big business, then you are having a big impact on those particular regions?

 

PHIL TOWNSEND: But I dispute that as well. I’ll give you an example from where Robert Belcher comes. The plantation industry is most probably responsible for about 12 per cent of the land sales and we are not the top bidders quite often for the land in that area. So almost 90 per cent of the land is bought by either agricultural users and it is those people who are looking for land.

 

If I can give you an example: for the dairy industry where there are claims made about the timber industry taking dairy land, there are 160-odd dairy properties that came on to the market in March in Victoria this year. The average asking price for those properties was $11,500 a hectare and that’s just way outside the ballpark for the forestry companies—most probably double the price that we can afford to pay.

 

PETER MARES: Robert Belcher?

 

ROBERT BELCHER: I just refer you to the Treasurer of the National Farmers Federation and I am quoting: Plantation businesses are only able to outbid farmers for land due to the tax benefits that they receive . And I’d also add that when we are talking about land transactions, the industry likes to confuse the transactions in the rural setting with actual large acre plantation size land transactions.

 

PETER MARES: So you say there’s a mixing up of statistics involving like houses and so on along with….?

 

ROBERT BELCHER: Absolutely.

 

JUDY CLARK: Peter, can I come in here please to clarify a point here?

 

There is an unfairness that is introduced between farmers who are growing wheat—sheep farmers and beef farmers et cetera—and farmers who are investing in these particular plantation schemes, who are largely city people too. Now, what happens is we typically have a plantation investor coming in and spending around $9,000 a hectare and putting that money into the plantation prospectors company. Now, it goes into a ray of entities, of companies, but out of that comes a situation where we have a hectare of plantations planted of course for land, bought a hectare of plantations, establish the roading and the fencing et cetera. The prospectus companies and their associated entities, most of their income—the overwhelming majority of their income—comes through the plantation investor. In other words, a tax minimising investor. They get a 100 per cent tax deductibility on their investment yet we get out of this investment an enormous capital asset—that is, the land, the road and the fencing—and yet that is not depreciated. So if a farmer goes along and buys land that land has to be depreciated; it cannot be 100 per cent written off in the year in which it was purchased. And this is one of the major problems with these schemes. It is setting up a level of unfairness depending on who the investor is. If you are participating in a managed investment scheme you get an enormous tax benefit relative to the farmer or the person on the land.

 

PETER MARES: Okay, now Phil Townsend, I am going to put that to you because you claim there is no differentiation in treatment.

 

PHIL TOWNSEND: No, look, it is actually completely incorrect because the money that comes in from the investors can’t be used to purchase land. And if you have a look….

 

PETER MARES: So where does the money come from to purchase the land?

 

PHIL TOWNSEND: Where the money comes from? It generally comes from a couple of sources—either the company is borrowing the money to purchase land or they raise equity in the share market. If any agricultural enterprise wants to follow a similar route they have got the capacity to do so. And what happens with these companies is: they outline that there will be a certain rate of return from the projects and they put that out into the marketplace and look for investors to come forward with capital and use that to purchase land. The same could happen for any agricultural enterprise. If there are good enough returns out of what is happening with the farm use they can come forward, put a prospectus in the marketplace and raise capital through the stock market, similar to what the forestry companies are doing at the moment.

 

PETER MARES: Phil Townsend, if I put $10,000 into one of these plantations, how much of my $10,000 goes, for example, in commissions to the financial adviser who recommends that investment to me?

 

PHIL TOWNSEND: Look, I don’t even know that information. It varies on a project-by-project basis. That’s the extremely honest answer. I just don’t know because the companies have special relationships that just aren’t on a commercial footing between themselves.

 

PETER MARES: Judy Clark, I think you’ve done some calculations on where you think the money goes.

 

JUDY CLARK: Yes. What we have, again, these are average figures and there are slight variations depending on the prospectus companies. But we have, as we mentioned at the start, around $9,000 per hectare for establishing and maintaining a plantation over its full rotation. Now, industry figures are suggesting that the actual costs of buying the land and planting and maintaining it over the full rotation is somewhere in the order of $4,500. So we have half of the actual $9,000 sitting there and people are asking: well, what happens to that money? The main area where that money goes, in my view, is into the gross operating margins of the prospectus companies. And if you look at their annual reports for 2005, we see gross profit margins averaging around 30 per cent to 50 per cent, which is extraordinarily good. That means that of the revenue that these prospectus companies are receiving, which again are through the investors, somewhere between 30 per cent to 50 per cent goes straight into the before-tax profits of these companies. That’s where a large part of the money actually goes after establishing the plantations.

 

PETER MARES: Phil Townsend, do you want to respond to that?

 

PHIL TOWNSEND: Yes. It seems that Judy doesn’t understand the way the 12-months rule operates. Why those profits would look like that, as she talks about the gross operating profits is because the companies collect the money in one particular year, then they have got to spend it over the following financial year. But in the year they collect it they also have to pay full company tax on the money they have collected. If they don’t have any costs to offset that, particularly if they are increasing their activities. All right, it mightn’t look it like that; in actual fact what happens with the companies operating in the forestry area, is their returns here are no different to what is happening with the top 200 ASX listed companies.

 

PETER MARES: Okay, let’s move on to another aspect of all this. Robert Belcher, up in that Snowy area, how have plantations changed the environment around the region where you live and farm?

 

ROBERT BELCHER: Well, we are looking at areas that are heavily planted out—40 per cent to 45 per cent of value is now in plantations. We are looking at a reasonably significant population decline and we are looking at the prospect of a lot of infrastructure services that people need to exist and prosper and enjoy the same standards of living basically as other Australians who are starting to be threatened.

 

PETER MARES: And in terms of the physical environment?

 

ROBERT BELCHER: Well, the physical environment—there are a lot of issues. One of the things that this industry likes to claim is that it is an environmentally sound outcome. Actually if you look at world research and you actually look at the effects on the ground, the No.1 issue that hits you is the effect on water. These plantations consume an enormous amount of water. Now, there are a lot of commentators, not just me, that claim that these tax arrangements are leading to a transfer of land ownership and water rights into the corporate world, and that is exactly what is happening. But the effect on the environment with this sort of totally unplanned development is catastrophic. Remember, we are on the roof of Australia, we’re in the very high country and there are a lot of dependant people on the water that comes out of these areas.

 

PETER MARES: Phil Townsend, the study published in Science magazine last year found that monoculture plantations do result in substantial reduction of stream flow as the forests mature.

 

PHIL TOWNSEND: Yes, and hopefully it’s also picked up that one of the authors of that, Dr Damian Barrett, referred to how little relevance that study had to the majority of Australia’s plantations.

 

PETER MARES: That study did indicate that in south west of WA there had been benefits but overall the impact was negative.

 

PHIL TOWNSEND: No, Dr Barrett actually clarified this after the report came out because there were some commentators who had spoken about his research and he clarified that, no, this not highly relevant to what is happening in Australian plantations at the moment. There are a number of reasons for that. I don’t know whether you want me to elaborate now?

 

PETER MARES: Perhaps I can throw this to Judy. Judy Clark, I would have assumed that plantations benefit the environment overall because they provide an alternative to logging of native forests. Now, is that a naïve view?

 

JUDY CLARK: No, I think that’s very accurate, Peter. I’ve been saying for many years now, and encouraging the plantation industry, particularly in the processing side of the industry because that is where the real benefits are. We’ve seen Australia’s plantation processes of sawn timber and wood panels and paper too become the dominant producers of wood products in Australia and the most important source of employment in Australia’s forest industries.

 

So on the one hand, I am very encouraging of this industry, particularly where you have the growing and the processing integrated in Australia because that is where we get the real benefits, both ecologically in displacing the native forest resource and also in employment generation.

 

The problem that I see with this scheme at the moment, which is the short rotation hardwood chips for export, is that we have a complete disconnect between the market and the wood growers. So the wood growers in this case are in fact people who are largely seeking a tax minimisation investment—that’s their main motivation—and a return in 10 year’s time is what they expect. But their main upfront motivation is tax minimisation.

 

What we actually see in the hardwood chip market is a trend and a long-term trend down in the real prices for hardwood chips of around one per cent per annum. Now, we have at this stage, a soaring investment in hardwood plantations and my concern here is that we have a hardwood glut situation. Well, it’s already here and we are building on it.

 

PETER MARES: Phil Townsend, [inaudible] old timber just like we’ve got a wine lake like that’s resulted from too many grapevines being planted?

 

PHIL TOWNSEND: No, it’s highly unlikely and for a number of reasons. Judy Clark’s outline there is quite incorrect. The different wood resources are not substitutes for one another. There are different requirements in the marketplace for wood from different sources whether that’s from plantation or native forests and that’s why it is not possible to talk about there just being one price for the woodchips. In general, it’s broken down into three major markets for woodchips and what we are finding with the plantation blue gums in particular is that the real price has been rising for the last five years. Why Australia is actually preferred as a location resource to access these resources there’s a number of very important reasons. One, is we can provide the highest quality resource in the shortest shipping time into Asia, a long-term contract, good infrastructure and we are highly reliable with good sovereign risk.

 

PETER MARES: I think one thing that both you and Judy Clark would agree on is that there needs to be more downstream processing in Australia of these woodchips.

 

PHIL TOWNSEND: Most definitely. And that was the other point I was hoping to pick up on based on Judy’s comments. About 40 per cent to 50 per cent of the wood that’s coming out of these plantations is already lined up for domestic processing. We have got about $3.5 billion of investment coming online or being planted at the present time to utilise the plantation material that has been grown around Australia at present, in addition to the processing of plantation material activities.

 

JUDY CLARK: Can I come in here, Peter? The issue here that we are talking about is the hardwood plantation program. And the hardwood plantation program is largely chip dominated and it will be largely, unfortunately, for the export market, unprocessed. If we were to process it in Australia we’d need to build, probably in the order of three, maybe four, large-scale pulp mills. We will be very lucky, in Australia, if we even get one off the ground.

 

PETER MARES: We know how controversial the pulp mill proposed in the Tamar Valley in Tasmania is.

 

PHIL TOWNSEND: We actually have three of them that we are talking about at the moment. And those three mills together will use approximately six million cubic metres of the wood that is coming online.

 

PETER MARES: We have obviously got an argument about the statistics here but let me bring Robert Belcher back in.

 

Robert Belcher, you mentioned earlier—and I’d like you to describe some more what this is doing to your local community.

 

ROBERT BELCHER: The unity within the community to oppose this is amazing and as I travel around Australia I find the same thing. They are intensely angry at how unfair this is. When you listen to this debate, just remember it’s predicated on the fact that there is, as Minister Abetz says, special tax arrangements to see this industry prosper. No-one is talking about the opportunity cost and the damage done to other industries. And when you actually look at the concept of people’s rights in this country, and you look at the government that says that it is an economically rationalist government and it believes that the market should be the ultimate determinant of what should happen and how resources should be allocated, this completely flies in the face of that.

 

When you practice agriculture and you are a price taker and you have to face international market competition and that international competition is inherently unfair, to then face this sort of unfairness in your own backyard, is simply staggering and the community….

 

PETER MARES: Well, this is brought on, though. This was brought on by John Anderson who was the leader of the National Party. I mean, the National Party are meant to represent you guys in farming areas.

 

ROBERT BELCHER: Well, that’s highly debateable. I mean, I’ve heard the old term ‘agrarian socialist’. Well, I am afraid we could drop the ‘agrarian’ and call it forestry socialism. And one of the questions that we are really asking is just, not only apart from this leakage out of government revenue—and I do know that we have the infrastructure problems and constant harping about the state budgets running out of money et cetera to provide the basics. If you really look at the whole concept here, we come back to making the point: when will this industry be able to stand on its own and how many other cross-subsidies are arriving via government cheque?

 

PETER MARES: Okay, Phil Townsend?

 

PHIL TOWNSEND: Look, quite importantly, the thing to understand with the plantation sector at the moment is that we have one rule for business assistance. It’s called [inaudible] investment in the following year.

 

PETER MARES: And it allows investors to claim a full tax refund in the first year?

 

PHIL TOWNSEND: No, the 12-months rule allows the structure for that across two financial years. If we didn’t have the 12-month rule, the investment in the managed investment schemes would be exactly the same—no different. All this does, this is a particular rule that let’s us gather money in one year and roll out the investment in the following 12 months.

 

PETER MARES: But people wouldn’t be investing in your schemes unless they could claim that 100 per cent back within the same financial year.

 

PHIL TOWNSEND: They have been able to do that for a decade.

 

JUDY CLARK: And that is what has generated the problem that we have of too much hardwood planting. If we can put this in perspective: Australia supplies around a third of the global hardwood chip market in terms of traded volume. Most of that comes from our native forests and around six to 6½ million cubic metres per annum.

 

Ian Ferguson, Professor of Forestry Economics at Melbourne University, has done some projects of the wood volumes likely to come on stream from these hardwood plantations and he is projecting that from last year, through to 2009, around eight million cubic metres of hardwood chips coming on to the market from these plantations each year and to increase after that 2009 period. Now, most of this resource will go on to the overseas market. We simply haven’t built the pulp mills to take it. So what we can do now is essentially double our wood volumes on to the global market in which we are already a dominant player. We already supply 30 per cent and yet we are not seeing any price signals that are suggesting that this resource is going to be taken up very easily at all. And why are we planting more trees when we have this market reality?

 

ROBERT BELCHER: The people who made that initial development of the industry have seen it ruined. There are people in horticulture and other agricultural ventures around the country who are looking and fearing these schemes arriving. And some of these schemes involve exactly the same companies that are involved in the plantation arrangements. And the other point that wasn’t made when they were talking about funding—and it was acknowledged by the industry recently—they used retained earnings from the investors’ contribution. In other words, they pay tax on it and then they use it to buy land. Now, all you’ve got to do is get a figure high enough to allow you to do that. In other words, seek the permission of the Tax Department for a product ruling and you’re off and running, and that’s exactly how they have financed it.

 

PETER MARES: I am going to have to interrupt you there, Robert. Phil Townsend, I’ll give you the last word on this.

 

PHIL TOWNSEND: All 15 companies that are producing timber under the managed investment schemes have established long-term contracts and are all looking at processing activities. The Tax Office themselves undertook a review in 2003 to determine if the fees were excessive or not and found that they weren’t.

 

PETER MARES: Okay, thank you all very much for joining us.

 

That was Phil Townsend who has just stepped down as CEO of the industry group, Tree Plantations Australia; Dr Judy Clark who is a forestry economist at the Centre for Resource and Environmental Studies at the Australian National University; and Robert Belcher, a farmer in the Snowy high country and founder of the organisation, Sustainable Agricultural Communities of Australia.