The days of investing in agricultural investment schemes purely for tax reasons are over.
The days of investing in agricultural investment schemes purely for tax reasons are over.
It’s not that agricultural investment schemes are no longer attractive tax in-vestment vehicles – they are.
But well managed agricultural schemes – specifically blue gum forest projects – are increasingly good investments in their own right.
But as with all investments, it’s important to sort the wheat from the chaff. The big companies in the industry are Great Southern and Timbercorp. They both have product rulings and are included on the recommended lists of Retireinvest, Count, Lonsdale and the like. Both have listed and both project returns in the vicinity of ten per cent. They have also been highly recommended by research house Van Eyk.
Western Australian company ITC is a comparative newcomer and yet last year ITC issued three prospectuses. All three received tax rulings and two were strongly recommended by van Eyk. This year ITC have two soft wood prospectuses with product rulings which were gazetted only last week.
ITC’s Richard Jackson says, “It’s a difficult investment to knock because of the tax incentives and the fact that the returns are reasonable over a long pe-riod of time. The government likes them because they help with the balance of payments, because they help address green issues and because they contribute to-wards the carbon credit system.”
John Cockle is managing director of Financial Foundations Australia (FFA), one of the largest independent financial services operations in the country with $230 million under management. FFA also provides marketing services and re-search to accountants and financial planners.
“In 1997 we didn’t like tax effective investments, we thought they were a joke. But because of the superannuation surcharge and the need of some of our clients for tax relief, we reviewed a number of schemes.”
The research was telling. “Our golden rule was that first the deal must stack up commercially – it could not just be an investment for minimising tax,” says Cockle. “We reviewed 24 projects and we found 21 you wouldn’t allow your worst enemy to invest in.”
Timbercorp’s Robert Hans agrees, “There are a lot of schemes about that put a bad taste in your mouth. In the past, there was no qualitative research done and planners stayed away.”
But it was not all bad news. Cockle says that three of the schemes he re-searched came up smelling of roses – and they were all blue gum industry proj-ects. “The thing about investing in the blue gum industry is that the govern-ment has a bi-partisan approach to agriculture – especially blue gum eucalypts,” says Cockle. And the reason Australia has such a favourable attitude towards the industry is that, without tree-cropping Australia will soon be unable to satisfy its own demand for wood products – let alone fulfil export demands.
If Australia can get it’s act together, Cockle says we are well placed for ex-port to South East Asia, Japan and other markets.
“The demand is for fine paper,” says Cockle. “Toilet paper, tissues right through to glossy magazine paper. In Japan every man, woman and child uses 300 kilograms of paper annually, in most other countries, it’s between 200 and 300 kilos. At the moment India uses 15 and China 10 – imagine if these countries start using things like toilet paper!”
Added to that argument is the impact of the Kyoto Protocol – an international agreement that sets out a range of binding greenhouse gas emission targets for developed countries. Carbon sequestration credits (credits gained when trees are planted to absorb carbon dioxide and store carbon) can be traded in a way which helps countries and companies meet their greenhouse gas emission obligations.
Although yet to be ratified, the Kyoto Protocol will put a lot
of pressure on companies which are not as environmentally minded as our blue gum industries and that puts Timbercorp and companies like it in a very good posi-tion.
And there’s no denying that even though Ralph effectively abolished the ’13 month rule’ blue gum projects are still tax effective investment vehicles.
“All Ralph has done,” says Hans, “is take away tax deductions for advance pay-ments. Deductions can now only be allowed in the year the work is carried out. We believe this is good news because it means that activity must be much more planned and that gives financial advisers a chance to look at schemes more rea-sonably.”
The way the deductions work is investors put forward a sum of money which buys a lease and management in the fixed term (usually 10 year) project. All the funds are paid upfront but they are 100% tax deductible. What makes the invest-ment more attractive is that the upfront investment can be as little as 10% with the balance loaned to the investor over 12 months interest free.
“The tax relief is certainly one of the benefits of agricultural schemes,” says Cockle. “They can knock out the superannuation surcharge and in a given year, they can help offset things like eligible termination payment (ETP) problems. They can also assist with capital gains tax (CGT) problems or help minimise tax for people with lumpy incomes – those people who might earn a lot in one year and not in the next.”
John Young, Chairman and Chief Executive of Great Southern agrees. “They suit people looking to defer income until it’s a more suitable time to pay tax, gen-erally these are professionals (doctors, dentists, lawyers), small business peo-ple and executive employees, for example airline pilots. Self managed super funds account for 16% of our business. Agricultural schemes are ideal for super funds and should be one of the products in the portfolio.”
But both Young and Cockle warn that investment in agriculture should form only one part of the total investment portfolio.
“From an investment point of view we still think super is number one,” says Cockle. “For diversity and spread clients need a range of investments. Agri-cultural schemes should only play a small part in a client’s portfolio, it should only be a small part of a total investment/wealth creation strategy.”
Young believes that blue gum schemes will become more popular as financial plan-ners become more aware of their validity as an investment vehicle. “Financial planners have been used to selling managed funds. This is a new managed fund into agriculture. It’s a tool for both wealth creation and tax planning. We listed in July last year at $1, we’re now trading at $4.30. It’s capped at $580 million which puts it in the top 200, making it, I believe, the largest tax-effective investment product on the market.”
Young also believes that GST will make the schemes more popular.
“Next year, as we enter the PAYG regime will be an interesting time – for some it will mean that they effectively have to pay two years’ tax so there will be enormous pressure on the financial planning market in the 2000/2001 financial year to manage tax affairs.”
And Young believes that June 30 will be too late to start thinking about tax planning. “Each year clients go to planners close to June 30, hoping for some fancy end of financial year footwork, but there are no more rabbits to pull out of the hat. They must think now. Clients won’t recognise this themselves, so it’s up to planners to be alert. 2000 is an unusual year with GST. Clients need to get their affairs in order well before 30 June – I don’t think many financial planners or even accountants are aware of that.”
