Year end strategies - can tax effective investments still bear fruit?

This year is shaping up to produce another bumper crop of tax-effective invest-ments, with most focusing on rural industries.

This year is shaping up to produce another bumper crop of tax-effective invest-ments, with most focusing on rural industries.

Apart from the traditional blue gum and vineyard projects, this year has seen agricultural investments - a veritable cornucopia - in just about every conceiv-able crop ranging from olives to coffee, nuts, fruit and even bamboo.

More than 100 projects are being promoted, or about to be promoted, with mil-lions of dollars heading into these schemes before June 30.

In the past, investors jumped headlong into any scheme that offered big tax breaks - often deciding in the last few weeks of June.

People frequently do not check to see if the project is economically viable as the focus was on the tax breaks.

Both ASIC and the Tax Office have been trying to clean this sector up.

Traditionally, tax-effective projects have accepted new investors until midnight June, 30 and if they pre-paid 13 months of expenses, this gave them a 100 per cent tax deduction starting the following day.

The Tax Office has tightened the rules on tax deductions through product rul-ings, which grant an individual project authority to allow deductions. Each rul-ing, however, clearly states that this is not an official opinion on the viabil-ity of the project.

In a further move to tighten the criteria for agribusiness schemes, the tax of-fice has now closed the 13-month deduction rule.

Agricultural business projects now have to demonstrate that the work which will benefit the investor has to be completed by June 30, says Northwood Financial Services managing director Rod North.

"Clearly, an olive or vineyard project cannot be prepared and planted in one day, effectively meaning an early closing date for tax-effective agricultural projects," he says.

The deductions are no longer allowed to exceed the amount of money that has ac-tually been spent by the promoter of the scheme prior to June 30.

North says planners need to revise their time cycle for using tax-effective schemes. "The timing of tax planning has been effectively changed and places an increased emphasis on tax planning to occur throughout the year," he says.

"Tax planning will now have to actively take place in the first six months of the financial year - not the last few months, as has been the case."

North says planners need to look at the schemes now as proper investments for their clients rather than ways of avoiding tax.

A planner should look for the following points in an agribusiness project:

* is the project a real investment? Will it fit in with the client's other in-vestments?

* The quality and experience of the management;

* The quality of the land being used;

* The presence and value of contracts for future production;

* The costs associated with different projects and compare like with like;

* What potential exists for what is being produced and is there a market for it?

* The quality of the research.

"What we will see is a total paradigm shift from freely available 100 per cent tax deductions schemes to a focus on the investment nature of each project," North says.

"The tax benefits will be available to the investor over several financial years, with a limited tax deduction available for this year."

A grey area on these new rules concerned schemes which had a product ruling be-fore the 13-month rule was scrapped. They have been granted a dispensation from the Tax Office for this financial year

North says the latest moves by the Tax Office give these alternative investments a proper status

"Alternative investments as a category are well on the way to becoming a legiti-mate sector for consideration by investors," he says. Financial planners should now look seriously at allocating between 3 to 5 per cent of a client's portfolio to this sector."

This financial year will be confusing for investors as there is no shortage of schemes offering tax deductions, says North.

"However, investors are likely to get deductions of between 30 to 40 per cent because they can only get a deduction for the amount of money that has actually been spent by the promoter," he says.