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Long haul back for plantations

WHILE Federal Government tax incentives have offered a lifeline to the plantation industry, many involved are wondering if it is enough to return such investments to the heady days before May this year.

It’s an unlikely scenario, according to Van Eyk Capital managing director David Marshall, who has been closely monitoring managed investment schemes for a number of years.

“While new incentives will be very welcome for investors and promoters of these schemes, as well as the suppliers to the industry, it doesn’t correct a fundamental imbalance in the industry,” Mr Marshall said.

“It certainly doesn’t address some of the key structural problems of the sector.

“Firstly, the managers are putting between 25 and 45 cents of every dollar invested in plantations in their own pocket, while investors, who are stuck in an illiquid investment for 10 or more years, are getting a pre-tax IRR of only a maximum of about 8 per cent a year. There is an obvious, and in our view, unsustainable imbalance there.”

He believes the second major concern is that the prospectuses often made ambitious claims about future returns. He said that this obviously would inflate the advertised returns to plantation investors.

Mr Marshall said that, while the Tax Office treatment of earlier managed investment schemes may have put investors off, the realisation that many of these schemes were structurally flawed also contributed to the drop in investment in the sector. Confidence was unlikely to return unless the schemes cleaned up their act, he said.

The Federal Government was forced to act to try and restore investor confidence following the collapse of Australian Plantation Timber just more than a year after listing on the Australian Stock Exchange.

Investors believed additional tax incentives were required if the plantation industry was to survive, following the ATO’s recent confirmation that the Product Ruling system was secure.

Heavyweight plantation companies Great Southern Plantations, Timber-corp and Timber Enterprises Australia hit the basement as investors slashed their holdings.

A shaky plantation industry threatened to unwind the Federal Government’s Plantations 2020 Vision target to treble the plantation estate to three million hectares by 2020.

Problems for investors first surfaced when Taxation Commissioner Michael Carmody started a very public campaign earlier this year against a number of earlier schemes, established well before the current Product Ruling regime.

Following the abolition of the so-called 13-month rule last year, the Government now has introduced a 12-month prepayment rule for plantation forestry, allowing investors to obtain an immediate deduction for funds contributed in one financial year for agronomic activities undertaken during the following year. However, it only applies to the timber industry.

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