Ark alliance may be the key to investor Rewards

Managed investment scheme promoter Rewards Group Ltd believes its close alliance with listed investment company, The Ark Fund Ltd, will reduce the adverse impact of recent tax changes on its non-forestry projects.

West Perth-based Rewards has become a major player in the MIS sector during the past five years, raising a total of $158 million for 24 different projects covering tropical fruit, sandalwood, teak and wine grapes.

Rewards’ growth was reflected in its rapidly expanding net profit, up 34 per cent to $19.8 million in the year to June 2006.

Ark (formerly known as Chester Mining) has become Rewards’ sister company, acquiring agricultural properties that are used by Rewards for its investment projects.

Its latest transaction, announced earlier this month, was the purchase of a $4 million, 76-hectare property in Queensland, which has been leased to Rewards for its 2007 berry project.

Ark chairman John Kenny, who is also a member of the Rewards management team, said the controversial tax changes would lead to a greater focus on quality in areas such as horticulture and viticulture.

“It will certainly curtail horticultural projects but won’t eliminate them,” Mr Kenny said.

“Genuine quality farming projects will still succeed.”

He said the tax changes meant “Ark is incredibly much more important to us than it was before”.

He emphasised that the structure put in place by Rewards and Ark meant investors would still qualify for tax deductions for rental payments and management fees.

Mr Kenny noted that Canberra-based Rural Funds Management already offered a managed investment scheme that was not a ‘tax-effective’ scheme and was therefore unaffected by the recent policy change.

RFM’s ‘chicken income fund’ is one of Australia’s largest contract chicken growing businesses, with total assets of $69 million.

The fund is classified as a public trading trust because it owns assets directly and is therefore taxed as a company at the corporate tax rate. As such, it is able to make fully franked and tax-deferred distributions to investors.

Rewards has backed the transformation of Ark from a mineral explorer to a specialist agricultural property investor over the past 18 months.

It is Ark’s major shareholder, with a 12 per cent stake, and provided security and a corporate guarantee so that Ark could obtain a $12 million loan facility from National Australia Bank last month.

The two companies are also run by the same trio of managers – Andrew Radomiljac, Craig Anderson and John Kenny.

The structure is similar to common practice in North America, where 40 per cent of all capital intensive agricultural operations separate the ownership of land and the farm business.

Ark’s first purchase, at a cost of $2 million, was a 473ha property in Kununurra that is home to some of Rewards’ tropical fruit projects.

Ark is expected to finalise the purchase of two fully-developed mango farms in Mareeba, north Queensland, later this month.

It is also planning to acquire properties that are used for Rewards’ sandalwood and teak projects, in the WA Wheatbelt and north Queensland respectively.

Mr Kenny said Rewards was aiming to raise about $70 million for its MIS projects this year.

It has already closed its 2007 berry project after raising $10 million.

A notable feature of the project was that Rewards has obtained the Australian rights to Driscoll strawberries, which Mr Kenny said was the leading variety in North America.

Rewards was aiming to raise $25 million for its teak project and $20 million for its sandalwood project.

It was still waiting to obtain a tax ruling for its 2007 tropical fruits project, but hopes to raise about $17 million.

The project will grow plums and peaches at Dandaragan in WA, mangoes at Mareeba and nectarines at Childers in Queensland.