Plant your own money tree

By Peter Sibbald

Thursday 1st July 2004

Want to reduce tax on your wage or salary?

Investment property is a tried and true tax minimisation method, but not one that everyone feels comfortable with. Financial advisors will tell you to invest in managed funds, ostrich farms or whatever investment has current sex appeal and pays them the highest commission. Lawyers will chant the mantra of setting up a trust.

Chartered accountants all too often see the results.

Profits are streamed into high management fees and return-sapping legal or accounting costs. The Consumers Institute recently released a report effectively concluding that throwing a dart at a list of share names will produce significantly better returns than investing in a managed fund.

Forestry investment can provide a good alternative. Set up a Loss Attributing Qualifying Company (LAQC), buy a block of land, plant seedlings, and watch them grow.

During the life of the investment, the money you spend on weed and pest control, fencing, fertilising, interest, insurance and rates is akin to paying into a managed fund or similar. However, it will produce a tax loss, which can be offset against the tax on your wage or salary via a vehicle such as an LAQC. A tax fund should result.

When the mature trees are harvested the income can be spread over a three-year period, smoothing the tax burden further. All the while the land on which the forest sits is also growing in tax-free capital value.

Here's a real example: Jane, a Christchurch office manager and her lawyer partner Brent, pay tax at a marginal rate of 33% and 39% respectively. They and another couple pooled their resources and purchased a block of land. The first year was tough, with most fine weekends spent living in a caravan on site, clearing scrub, planting seedlings and spreading fertilizer. But they enjoyed it - Jane says it was like taking a (tax-deductible) holiday every week.

Not only is the forest their personal superannuation fund, it provides an annual tax refund of around $5000. It has also given the couple the confidence to take control of their future, instead of leaving it all to a faceless fund manager.

As always, there is some fine print to be considered. The forest must be a "business", not merely part of a lifestyle block. Thought needs to be put into the legal structure and technical forestry advice should be sought. One size does not fit all, and you'll need enthusiasm to see the job through, or the resources to pay someone to do the work for you.

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