fea moving last 2 days, page-3

re: fea & other plantation stocks FEA and other plantation stocks get a good mention in this special Fin Rev. report--maybe the reason for the price hike & extra volume yesterday???
ATO and an olive branch
Jun 5
Cathy Bolt

They may never quite shake off that slightly suspect image, but the crop of tax-effective agribusiness investment projects - which has survived the turbulence and scrutiny of the past few years - appears to have gained a greater degree of investment respectability.

Shane Kelly, the head of one of a handful of research houses that rate the projects, describes the rationalisation in the managed investment scheme industry over the past three years as the correction it needed.

"Now we have a very sustainable number of project managers who will continue to diversify their product offerings," he says.

This year, in the lead-up to the pre-June 30 peak selling season, the variety of schemes on offer is almost as diverse as ever. It includes bluegums, olives, wine, grapefruit, table grapes, sandalwood, truffles, almonds and cattle.

But the number of projects has fallen to less than 40, fewer than half that being marketed in 2000.

Among the factors contributing to the decline has been the scrapping, for all but timber plantations, of a prepayment rule that allowed investors to claim deductions up to 13 months before funds were actually spent by project managers, encouraging promoters with minimal capital to get into the industry.

But the major cleansing influence was the crackdown two years ago by the Australian Taxation Office on dozens of schemes that had been mass-marketed in the 1990s, disallowing hundreds of millions of dollars in deductions.

Since then, ATO product rulings have become essential for any promoter who wants to market a prospectus. Without an advance product ruling, which guarantees deductions as long as project managers comply with their prospectuses, virtually no financial adviser will recommend a project, notwithstanding the healthy commissions they earn by selling them to their clients.

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What has not changed over the past three years is the principal lure of most agribusiness projects - their tax advantages. The majority are structured so that most or all of the investment goes towards leasing and management fees, rather than capital assets.

Thus, most or all of the investment is tax-deductible in the year it is made. For an individual paying the highest marginal rate of tax, the amount invested is effectively close to half the nominal figure. Where a loan is made to fund the investment, the interest on that is also tax-deductible.

Increasingly, however, investors are being urged to judge the investment worthiness of the projects without taking into account the upfront tax effects. Investors are being urged to compare and scrutinise the cost of entry, ongoing management fees, forecast yields, the marketing arrangements, whether they ultimately get an interest in land and other assets and the track records of the managers.

One research house, van Eyk Capital, has been particularly zealous in rating the schemes purely on their pretax returns.

Unfortunately for the promoters, year after year van Eyk has identified less than a handful that come up to scratch, taking into account the need for above-average returns to compensate for agricultural risk, the illiquidity of the investment and, in the case of trees, the length of the investment.

So, what is the pick of the bunch for 2003? Unfortunately, it is not as easy as scanning the research houses and picking out the projects they rank highly. Van Eyk's research is funded by subscriptions from financial planning networks but the rest - Shane Kelly's Adviser Edge, Australian Agribusiness Group, Lonsec Agribusiness Research and PIR - are paid by the promoters to review individual projects, at about $20,000 to $30,000 a time. That means not all projects are reviewed by all research houses.

Adviser Edge, for example, recently released a list of its top 10 schemes for 2003, from the 35 it reviewed. Leading its table with 4 stars were Gunns Plantations' woodlot projects in Tasmania and Treviso table grapes, a project at Mildura managed by SAITeys McMahon AgInvest.


Then, with four stars, were Wilmott Forests project, Rural Funds Management's premium vineyard fund, Timbercorp's almond project, Palandri Winery's American project, Enviroinvest's cattle project, Margaret River's Watershed Premium Wines and Timbercorp's eucalypts project.

Of the nine projects it has finished reviewing, Australian Agribusiness Group gave its highest overall rating of fours stars to Wilmott Forests and Timbercorp's almond and eucalypt projects, but also to Tanunda Hill Vineyard, which did not make Adviser Edge's list.

AAG also gave 3 stars to Great Southern Plantations' and Forest Enterprises' plantation projects - which did not make any other lists - and to the Palandri project, the Watershed vineyard and Frankland River Olive Company.

But Mike Hendricks, from Integrated Tree Cropping, points out that its 2003 eucalypt and sandalwood projects were not reviewed by Adviser Edge or AAG. Lonsdale Securities, on the other hand, awarded it 82.6 points out of 100, putting it in the recommended category.

Lonsec's Marty Sammons says the firm agrees with some of the other researchers' picks and strongly disagrees with others. Lonsec has released its first highly recommended rating on a project this year - for the Macquarie Forestry Investment - but that is subject to it getting a product ruling, which it was still waiting for in late May.

Sammons says the Macquarie product's highly rated features include its links with an established timber processor, Midway, its conservative timber yield forecasts and an attached investment in the underlying land, giving investors something at the end of the project's life. Lonsec did not review Gunns' latest project, which blitzed the market last year with a per-hectare price far below its nearest competitor and ultimately raised $65 million.


As for the wider environment, many promoters and some research analysts still believe the ATO is engaged in an undeclared war against the industry. AAG's Marcus Elgin claims that the ATO's latest tactic is to slow the release of product rulings to a point where promoters have too little time to market their products before the cut-off date for tax deductions.

He calculates that in the year to the middle of May last year, the ATO had issued 66 product rulings, of which 43 were agribusiness projects. To the same point this year, it had issued 26 product rulings, of which 21 were agribusiness projects.


The ATO's assistant commission for small business, Cheryl-Lea Field, says the ATO is absolutely not opposed to the MIS industry. She says it does not approve of the artificial finance arrangements prevalent in the schemes in the 1990s, but its support for appropriately structured projects is evident in the dozens of rulings it has issued since.