Value Your Trees

Trees, tax and transaction

The question of tax on trees when selling or buying a lifestyle block is often avoided. This is because to most people it’s a mystery. It’s fairly simple and quite important. It is important because as an IRD officer pointed out to me in a recent conversation “sooner or later we will catch up with people and tax will be paid on trees.” Do I now have your attention?”

Let’s use a 4-hectare block planted with 2 hectares of trees as our example. The tree species is not important to the issue of tax in our example but in a lot of cases it will be pinus radiata.

So you have a 4 hectare (10 acre block) planted with two hectares of pine trees. Let’s assume that they were planted in 1996 and have been pruned and thinned.

So you have 2 hectares of 12-year-old pruned pine trees. You decide to sell your block. You ring your real estate agent and they assess the land value to be around $250,000.

You ask him “how about the trees?’ He answers “ask me a question on sport!”. In other words he hasn’t got a clue.

In a lot of cases the trees are ignored and given no value – this is not a good situation for the buyer or seller.

All trees have some value.

A recognized method is called Discounted Cash Flow Analysis D.C.F.A –discounting is the opposite of compounding.

We use the present market price for the mature timber (as at year 28) and discount it back to the present age.

i.e. from 28 down to 12.

Let’s assume the 2 hectares would fetch $50,000 at age 28 (after tax, $75,000 before tax) what would it be worth at age 12 using DCFA?

The answer is approximately $12,000 using an 8% discount rate.

So you as the seller of the land and trees would be asking for:

Land $250,000.

Plus trees $12,000

Total $262,000

You record this on the sale and purchase agreement you the seller become liable for tax on the $12,000. The buyer becomes liable for tax on the harvested value less the $12,000. If our example came true the buyer would pay tax on ($75,000 less $12,000) = $63,000 instead of $75,000.

This situation is a win win for both buyer and seller so remember to value your trees!