Farm Forestry New Zealand

Buying or selling land with standing timber

Murray Downs, New Zealand Tree Grower February 2005.

What does standing timber mean?

Standing timber means the current value of trees that have been planted which will yield saleable timber when felled at maturity, usually forestry trees. The Inland Revenue accepts that fruit trees do not generate saleable timber, and also excluded are ornamental or incidental trees, such as isolated or garden trees.

The strict Inland Revenue interpretation of the term ‘standing timber’ includes natural native bush, shelterbelts and erosion planting. Unless these plantings have been managed for forestry, the practice of most farmers and solicitors is to exclude any mention of them in property sale and purchase agreements. In effect this gives them a nil value. This includes all the small plots of special purpose species.

It is all strictly standing timber and potentially income earning, but very variable and unknown in value, and often just left out.

Natural native bush

Sometime ago, we had a case of how to treat the sale of land that had a substantial natural native bush block. Strictly speaking it should be valued, and included by a vendor or seller as income. But the vendor has the right to look, to determine what the value of the standing timber was when he bought it, and deduct that cost of bush from his sale price.

This means the Inland Revenue could want to go to the previous owner and assess them for tax on the increase in the standing timber value when he sold it to the current vendor many years previously and so on, until you get back to the Maori chief who sold the bush for some blankets and a rifle.

In the end, we settled on the argument that the bush would have had a value at the time that it was bought. Since then the overall tree growth and attrition meant no real increase in standing timber volume. But this ignored the overall increase in the value of the timber.

Do not rely on your solicitor or accountant to pick up the fact that there is standing timber on the property. It is quite likely that tree costs were correctly written off as100% deductible expenses years ago and will not feature anywhere in the financial accounts.

You need to tell them what is there so you are made you aware of current practice.

Standing timber values

Standing timber is the tax element of a land sale, taxable to the seller. It is in the interests of the seller to negotiate standing timber values as low as possible. The exact opposite is true for the purchaser – he wants to have as high as possible standing timber values. We're aware of a case where standing timber on a property was valued high in 1993 during the timber price spike. Then when the farm was sold, the lower 2002 year standing timber value actually gave a loss on sale.

If I was a purchaser of a property with standing timber, this would be my opportunity to ensure that total value of the trees was recorded as a condition in the sale and purchase agreement, with a schedule attached. The schedule would note each separate block by age and species and its value. I would want that future tax deduction for each respective block.

Keep a record and get a valuation

For small blocks I would use rough per-hectare values. Typically, foresters value young trees by how much cost they had incurred to date. So for four-year-old radiata that has just had its first prune, this would be about $1000 per hectare for the planting and establishing costs, and another $500 per hectare for the cost of the first prune.

Once the trees are over 10 years old, valuations are done by coming t them from the other end. Then you need to work out what these 10-year-old trees will be worth at harvest time in another 20 years at today’s timber values, then discount that lump sum back to bring you back to today’s value. For larger uniform blocks over five hectares I would get an independent contractor to give me a written value. For very valuable blocks, a registered forestry consultant would be well worth his price.

When presented with this sort of evidence, most vendors or sellers are quite happy to include the value in the property sale and purchase agreement.

What about the person selling?

What should the vendor be doing?

To get the best value, a vendor should already have his tree records and forest pruned stand certificates available, and details of any current valuations. To avoid the risk of having the transaction reassessed by the Inland Revenue, a vendor should ensure that a reasonable value of standing timber should be included in the sale and purchase agreement. The Inland Revenue has clearly stated authority to reassess the value of standing timber where matters have been left out or are not market based.

There may be some express contract terms that allow you to bring forward part of the sale of standing timber split over a balance date, but you will need to discuss this with your lawyer.

Future-proofing

Whenever you purchase or sell land with trees, get a reasonable value agreed to and written in the sale and purchase agreement. Keep any valuations and your workings. If you are buying, get your accountant to obtain from the Inland Revenue a ‘determination of the cost of bush’. This is future-proofing your tax deduction when you come to sell that standing timber.

Please remember that the information in this article is of a general nature, and you should get separate professional advice for specific land and standing timber sales.

Murray Downs is a Chartered Accountant for Down to Earth Accountants in Te Awamutu