Investors, MIS managers cautious ahead of legal ruling

Managed investment scheme project managers are confident investors will support their 2008 capital raising programs, despite uncertainty surrounding the future of non-forestry projects beyond this financial year.

Nearly 12 months after the Australian Tax Office announced it would not issue any product rulings for non-forestry MIS, the industry is currently in the middle of a transition period, due to expire on June 30, pending the outcome of a long-awaited test case.

The test case, which will decide if investors in MIS are deemed to be carrying on a business and therefore eligible for tax concessions, could have far-reaching ramifications and essentially signal the end of the non-forestry MIS industry.

Already several project managers have announced that they will not be offering their projects to investors beyond 2008.

Others are more optimistic, saying the ATO will lose the test case and the federal government will be forced to conduct a full inquiry into the industry, which would inevitably lead to an extension of the transition period. In this case, 2009 would be business as usual.

The ATO’s announcement has had an impact on the pool of projects on offer for 2008.

Adviser Edge managing director Shane Kelly said there weren’t a lot of new managers or new projects among the 65 or so projects on offer.

“We haven’t seen a lot of change this year,” Mr Kelly told WA Business News.

“The incentive for coming into the marketplace is pretty limited, especially for non-forestry.”

In 2007, managed investment schemes raised $1.1 billion, almost identical to the 2006 figure, according to the Australian Agribusiness Group.

Timber investments dominated the result, receiving 59 per cent, or $698 million, of the funds raised.

But the number of investors in the sector in 2007 was down compared with the previous year, as was the number of new projects released.

Mr Kelly said he expected this year’s result would be down on 2007, with the impact of the drought in the eastern states also an influence.

West Perth-based Rewards Group, which is offering sandalwood, berry, teak and tropical fruits projects this year, says it is expecting its biggest year yet.

The company is looking to raise $75 million in 2008 on the back of the four projects, and possibly a fifth premium vineyard project, which is up on the $59 million raised in 2007.

Managing director John Kenny said the company may look at restructuring its projects next financial year if the regulatory environment changed.

“Our business will go on, win or lose in relation to the test case,” he said.

The ASX-listed property arm of Rewards Group, ARK Fund Ltd, significantly increased its landholdings in 2007, and now holds $43 million worth of assets.

Acquisitions were focused primarily on horticultural and teak properties in far north Queensland, as well as a sandalwood property in Western Australia, near Pingelly.

The listed company also won the backing of the Wyllie Group, which upped its shareholding to 10.03 per cent in December.

The country’s dominant agricultural investment player, Great Southern Ltd, has introduced two new projects in light of the possible changes – the Renewable Fibre Project, formerly the woodchip project, and the Rural Opportunities Fund (ROF).

General manager Cameron Rhodes said the ROF was not a tax-effective MIS mainstream product, but rather a unitised fund in which investors buy units in the fund, which would be used to buy agriculture and infrastructure assets.

The ROF covers a broad range of agricultural commodity classes, with investments in chickens, wine grapes, cotton and flowers, and the addition of cattle likely in the near future.

Mr Rhodes believes investment sentiment in this year’s MIS offerings is showing good early signs, with high taxable incomes and volatility in the markets highlighting the potential benefits of diversifying and having some exposure to the agricultural sector.

“Great Southern is already such a dominant player in the commodity market, we’ve got vineyards we’ll be managing for another 10 years, we have a commitment to staying in the industry for the long term,” he said,

Arafura Pearls Holdings Ltd and Watershed Premium Wines Ltd are two managers to have indicated that 2008 will be the last year for their respective projects.

Arafura chief executive Andrew Hewitt said the company would not be offering an MIS next year, barring a further extension to the transition period.

“Our forecasting has been on the basis that we don’t have an MIS for 2009,” he said.

“But there’s still a few more twists and turns to go.”

Arafura is looking to raise $13.5 million in this year’s project, up from $10 million last year, to fund production at its principal pearl farm at Elizabeth Bay in the Northern Territory.

It is reportedly already funded through to full production in three to four years’ time, when it will increase its pearl harvest from the current 35,000 pearls to between 300,000 and 350,000.

Watershed Wines managing director Geoff Barrett said the 2008 offering was seeking to raise $5.3 million for its fourth stage, a new vineyard in Jindong, in the Margaret River region, which is immediately adjacent to its stage 3 vineyard.

Upon completion, stage 4 will take Watershed to 227 hectares under vines.

Mr Barrett said this year was the last opportunity for investors to be involved in the project.

“Our objective from day one, since 2000, was to plant 230 to 240 hectares, and as fortune or whatever happened we would have intended to stop [at this time] anyway,” he said.

The Oak Valley Truffle Project 2008, which Mr Barrett also manages, will soak up the truffles not allocated by March 2008.

The project currently has about 75ha of oak and hazelnut trees at its Hazel Hill property in Manjimup, with the intention of putting 300ha under truffles in six years’ time.

Mr Barrett said the company would look to target self-managed super funds next year.