RECENT controversy over tax-driven investment schemes has left many investors wondering if they should put money into this sector.
RECENT controversy over tax-driven investment schemes has left many investors wondering if they should put money into this sector.
The controversy was triggered by an Australian Tax Office decision to disallow claimed deductions on various schemes. The disputed claims are currently subject to judicial review.
In the meantime, a range of promoters is in the market seeking funds, primarily for agribusiness projects such as eucalypt and pine plantations. How should investors assess these schemes?
“The key is to look for a sound investment, not simply one offering a tax deduction,” Great Southern Plantations managing director John Young said.
“There are plenty of ways to get a tax deduction. One of the best is simply to make a donation to your favourite charity.
“But if you also want to secure your financial future, then you must apply the same criteria to this decision as you would to any other venture, considering the strength of the investment, the likely returns, the security it offers, and other relevant factors.”
Burdett Buckeridge Young analyst Martyn Jacobs said there were fundamental differences between the promoters of the past and the current generation of project managers.
One of the main differences was that projects now could obtain a product ruling from the Tax Office concerning the eligibility for tax deductions, rather than relying on a private legal opinion.
“It is precisely the design and establishment of the product ruling system in 1998 that serves to clarify and eliminate uncertainty for investors”, Mr Jacobs said.
“Provided the manager strictly adheres to the criteria laid down in the product ruling, then the ruling is legally binding. The leading participants in the industry have a strong track record of obtaining such rulings and acting within their framework.”
Most agribusiness projects are promoted by a handful of listed management companies. This group could soon get smaller, with Yates announcing last week it was in merger discussions with unlisted company ITC.
As the companies are listed, investors are able to buy shares in the management companies as well as, or instead of, investing in specific projects.
Mr Jacobs described Timbercorp as the undisputed market leader. It had the largest estate under management with an anticipated 73,000 hectares by June 2001, he said.
Mr Jacobs also rated APT and Great Southern as a ‘buy’, describing the sector as “an excellent opportunity for savvy investors”.
The economics of plantation projects are based on growing demand in Asia for paper (and therefore pulpwood), along with environmental concern about logging in native forests. Australia’s proximity to Japan and Korea means that local plantation timber is well placed to meet this demand.
The returns from individual projects are subject to a range of variables and even the project managers acknowledge it is difficult to calculate likely returns. The variables include the cost of timber production, harvesting, transport and ship loading, and the long-term price and demand for woodchips.
Investors should study the assumptions underlying profit projections in a prospectus and ask if they are reasonable. They also should assess the expertise and credibility of the manager, and check if the manager has a proven track record.
Investors also need to recognise that plantations are long-term projects, which earn revenue only after about 10 years. Therefore, they tend to suit investors with a self-managed superannuation fund.
The controversy was triggered by an Australian Tax Office decision to disallow claimed deductions on various schemes. The disputed claims are currently subject to judicial review.
In the meantime, a range of promoters is in the market seeking funds, primarily for agribusiness projects such as eucalypt and pine plantations. How should investors assess these schemes?
“The key is to look for a sound investment, not simply one offering a tax deduction,” Great Southern Plantations managing director John Young said.
“There are plenty of ways to get a tax deduction. One of the best is simply to make a donation to your favourite charity.
“But if you also want to secure your financial future, then you must apply the same criteria to this decision as you would to any other venture, considering the strength of the investment, the likely returns, the security it offers, and other relevant factors.”
Burdett Buckeridge Young analyst Martyn Jacobs said there were fundamental differences between the promoters of the past and the current generation of project managers.
One of the main differences was that projects now could obtain a product ruling from the Tax Office concerning the eligibility for tax deductions, rather than relying on a private legal opinion.
“It is precisely the design and establishment of the product ruling system in 1998 that serves to clarify and eliminate uncertainty for investors”, Mr Jacobs said.
“Provided the manager strictly adheres to the criteria laid down in the product ruling, then the ruling is legally binding. The leading participants in the industry have a strong track record of obtaining such rulings and acting within their framework.”
Most agribusiness projects are promoted by a handful of listed management companies. This group could soon get smaller, with Yates announcing last week it was in merger discussions with unlisted company ITC.
As the companies are listed, investors are able to buy shares in the management companies as well as, or instead of, investing in specific projects.
Mr Jacobs described Timbercorp as the undisputed market leader. It had the largest estate under management with an anticipated 73,000 hectares by June 2001, he said.
Mr Jacobs also rated APT and Great Southern as a ‘buy’, describing the sector as “an excellent opportunity for savvy investors”.
The economics of plantation projects are based on growing demand in Asia for paper (and therefore pulpwood), along with environmental concern about logging in native forests. Australia’s proximity to Japan and Korea means that local plantation timber is well placed to meet this demand.
The returns from individual projects are subject to a range of variables and even the project managers acknowledge it is difficult to calculate likely returns. The variables include the cost of timber production, harvesting, transport and ship loading, and the long-term price and demand for woodchips.
Investors should study the assumptions underlying profit projections in a prospectus and ask if they are reasonable. They also should assess the expertise and credibility of the manager, and check if the manager has a proven track record.
Investors also need to recognise that plantations are long-term projects, which earn revenue only after about 10 years. Therefore, they tend to suit investors with a self-managed superannuation fund.
