The Financial Review
Tree schemes stir deep-rooted ire
Author: Narelle Hooper with Fiona Buffini
Date: 12/08/2006
Words: 1957
Source: AFR
Publication: The Financial Review
Section: Perspective
Page: 22
Tax incentives that favour plantations over other land uses are distorting the value of land and resources.
Robert Gerard just loves timber. The controversial Adelaide businessman, Liberal Party donor and former Reserve Bank of Australia board member describes his 2000 hectares of pine at Rosewood near Tumbarumba in southern NSW as a nest egg. He says the forestry has been good for the farmers and fantastic for the region and in coming years the carbon credits to be had from trees would be a goldmine for Australia.
"Not many people set out with a 30 year business planting 100 hectares a year," he told The Weekend Australian Financial Review in July. "I did that. I believe in timber, but I'm a bit of a queer bloke. I believe timber is a good investment."
But Gerard has a lot less timber to love than he used to have. And around Tumbarumba in the foothills of the Snowy Mountains, the locals don't like Gerard very much at all.
To farmers in the Lower Bago Valley, Gerard is the neighbour they never see but for occasional sightings of his helicopter, who sold them out to the enemy - pine plantation operator Willmott Forests Ltd.
The deal, finalised with Willmott just days after Gerard's resignation on December 2 from the Reserve Bank board over a multimillion-dollar tax scandal, halved Gerard's land holding. On December 16 last year, he booked a tidy $6.7 million selling two prime cattle properties of 1610 hectares to Willmott to convert into pine plantations for its Managed Investment Scheme.
The anger about the Gerard sale encapsulates the growing conflict between established rural landholders and the new breed of absentee tax-driven owners.
The friction is becoming an increasing issue for the federal government review of the tax treatment of MIS timber plantations and agribusiness schemes being conducted by assistant treasurer Peter Dutton.
Plantations have long been established in this part of NSW. It is their rapid spread that has been the main cause of the recent friction. MIS offers attractive tax deferrals for investors. The rapid expansion of the tree schemes has sparked growing opposition in rural communities and concern in investment markets about the long-term viability of the sector.
"It was a bolt out of the blue," says the deputy mayor of Tumbarumba Shire Council and a Rosewood neighbour, Graham Smith, of the Gerard sale.
Lower Bago angus cattle and merino sheep farmer Jeff Grady, who is affected by the change in land use, says he and his neighbours were devastated. MIS operators such as Willmott and Gunns Ltd in the nearby Maragle Valley had started to get a toehold in the area and the Gerard sale gave the plantation company a huge foothold in a prime agricultural valley.
"They've wrecked this valley," Grady says. "We were shocked for weeks because it changes your whole future. He has basically destroyed this valley and the community for his own personal gain.
"It's only tax breaks that are driving it and it's too high-value a country to be used for generating tax breaks for those blokes."
Gerard's employees were surprised too. Just weeks earlier they'd cut and stored masses of silage on the property for winter feed and hired a contractor to fix up the fences. Local stock and station agents also had to scramble to find buyers for 2000 cattle as the breeding herd Gerard had been building up was dispatched for about $1.5 million.
There has been plenty of speculation as to what prompted the sale. Gerard had spent five years buying up the best cattle properties in the area. He'd weathered a lengthy battle with neighbours and the council against his plans to expand his private pine plantations.The betting among locals is that Gerard needed cash following his $75 million settlement with the Australian Taxation Office in late 2003 and welcomed an attractive deal with Willmott after his exposure in the media over his tax affairs.
Despite Gerard's professed love for his trees, Willmott didn't think the 100 hectares of eight-year-old pine trees on the Gerard properties were such a great investment, and judged them fit for liquidation. In February, Willmott brought in the bulldozers, windrowed the trees and burnt the lot. They quickly made way for rows and rows of pines that were owned by a new crop of Willmott's tax-driven investors.
Willmott chief executive Marcus Derham, who claims he wasn't close to the arrangement, says: "He may have had some young trees that we may have come and knocked a few over. It depends how mature they are and if there's less than optimal spacing."
Derham confirms that Gerard has also been an investor in Willmott MIS plantations. But despite local talk that Gerard is a big Willmott shareholder, neither he nor his private companies appear on Willmott's register of shareholders.
When contacted, Gerard's office said he was away from his office and unable to respond to requests from The Weekend AFR for further information. In July he said he was a big supporter of Willmott. In his submission to the government, Gerard sided with the MIS operators and urged the federal government to maintain special tax treatment for timber plantations.
Derham describes Gerard as a big supporter of agroforestry who likes what Willmott does and a pretty-boots-and-all kind of guy.
"Rob's been a great absentee member of the Tumbarumba community," Derham says.
"He has been involved. It's a pretty tight-knit community. He's had cattle and sheep and trees and he understands how they can co-exist."
But to the locals, the Willmott deal embodies everything they see as wrong with the fast-expanding managed-investment scheme sector, which raised more than $1.14 billion from investors last year. For starters they can't see the economic logic in how there can be more money in planting new trees than in allowing existing ones to grow and mature.
Neighbouring farmers say they're doomed now to be surrounded by pine trees and fear the loss of productive farms and families from the community.
Jeff Grady says: "He's quoting employment opportunities but it's not happening.
"They neglect to deduct the jobs they've robbed from the community by pushing out the farmers and the business the farmers put through the towns during the year."
Grady says there are also serious concerns about the impact on environmental water flows. Tree plantations are thirsty. "It's good country for pine trees but it's also very good country for agriculture and by planting this high-rainfall land to pine, you are affecting your water yield further down the river."
A 1989 NSW Forestry Commission paper warned about the impact of extensive pine plantations in reducing environmental water flows. A number of other recent studies have raised similar issues.
Deputy mayor Smith expresses concerns at the loss of farmers, who are the major ratepayers in the area, while the council faces an escalating bill for road infrastructure for the timber industry.
"We walk a knife edge where your major ratepayers are your farmers and the timber on the other."
Of the impact on water flows, he says: "They deep rip on the contour and plant the trees, and that stops the run-off into streams. They'll tell you it doesn't, but it does. You can see the difference . . . there are creeks here are bone dry . . . we're worried because we are the catchment area for the Murray."
Merv Whittaker, whose 100 hectare block is caught in the middle of the land now owned by Willmott, chooses his words carefully. "There's a lot of worry and anxiety amongst the townspeople. It's not only this valley. The same thing is occurring in a dramatically short time in two other valleys nearby."
Gerard says he planted his first trees in 1983. By the late 1990s, he had expanded substantially in the valley by buying a number of prime cattle properties. His plans to expand the timber plantations brought increasing opposition from farmers and the council.
Graham Smith says Gerard has been low-key. "He's been a good employer of people in the Rosewood area. It was only this sale to Willmott that upset a few people in the valley."
Gerard argues in his submission that the expansion of timber scheme operators in the area has improved land values and provides employment. Jeff Grady retorts that it has been good only for a handful of farmers. Other farmers, he says, want to remain on the land but face a dramatically different environment.
Others say the local council has been bluffed by the timber lobby because the industry doesn't generate the huge employment they claim.
Tumbarumba Shire Council mayor George Martin says the expansion of the plantation sector in the area is proving difficult for council and the community. "There is a lot of emotion concerned. It's a difficult issue." He says when the plantation companies move into a valley they typically make an attractive "flagship" offer above the going rate. Early last year Gunns Ltd paid $2.5 million for 684 hectares in a neighbouring valley.
"The first one to sell gets the money and the last one gets very little," Martin says.
"We know we have major users who need the timber to be expanded. We also have grazing interests around who contribute to the local economy and we need them to be around. And we have a significant tourism industry and there are problems with wall-to-wall pine plantations blocking out the vistas."
The council has convened a working committee of grazing and pine representatives to try to resolve issues. But as plantation approvals have been in NSW government hands since 1999, Martin concedes this is basically a public relations exercise. "They don't have to bother with us at all, it's basically public relations."
In a phone call to The Weekend AFR in July in support of his submission to the federal government, Gerard said: "The big thing we haven't talked about is tax credits for carbon. When that becomes a [reality] they'll be worth a fortune. Once we can do carbon trading, my forests will give me enormous income. I might leave them there. You could make more out of credits than timber. Australia could make a goldmine out of credits."
Willmott's Derham says he's had discussions with Gerard about the possibilities for future credits. "It's something our business is looking at. We haven't done a carbon trade but we are certainly waiting for the right opportunity to do that."
Scheme operators have up to 12 months after raising the capital to find land and plant the trees for their investors, who gain attractive initial tax deductions.
The federal government has been consulting on proposed changes to the tax treatment of the schemes. The proposals include a cap of $6500 a hectare in first-year tax deductions, and extending the planting period to 18 months.
MIS opponents say this cap is still many times greater than the true cost of establishing plantations - and the real problem is that the tax incentives are all initial and there's no scrutiny of investment yields.
"Much of this vigour in the pine industry is caused by the 12-month rule, which seems to be working extremely well with lots of activity happening in my region," Gerard says in his submission.
"Personally, I cannot see why you need to change something that is working well."
