Non-forestry investors fight tax office on Florence Chong | August 16, 2008 THE multibillion-dollar agribusiness investment industry took the Australian Taxation Office to court this week in a test case which could determine whether thousands of investors in non-forestry schemes will be allowed to claim tax deductions.
After a two-day hearing, which ended yesterday, the Federal Court is expected to hand down its decision later this year.
Agriculture Investment Managers Australia -- whose members include Timbercorp and Great Southern Ltd -- challenged the ATO over its draft ruling in April, withdrawing tax deductions from non-forestry managed investment schemes.
The industry appears to be cautiously optimistic that its argument might prevail. It argues that its investors -- like farmers -- carry the financial risks caused by the changing price of their crops.
Since 1998, when the managed investment scheme legislation was introduced, promoters have marketed the schemes as "tax effective" investments.
Investors were able to claim a 100 per cent tax deduction on their investment.
Great Southern spokesman David Ikin said investors were engaged in business activities and they had to carry risks. Businesses received deductions for business expenses, he argued.
Ultimately, said Mr Ikin, schemes had to be a good enough investment proposition, otherwise people would be "crazy to spend one dollar to save 50c in tax".
Great Southern manages around $2 billion -- of which about 70 per cent is in forestry and the rest in non-forestry schemes, such as olives, almonds and vineyards.
Tim Lee, director of research firm Australian Agribusiness Group, said investors ranged from low-income earners to "heavy hitters", with individuals with up to $10,000 to invest. Mr Ikin said the typical investor was aged between 40 and 50 and starting to think about an income in their retirement.
Investors get the tax deduction upfront, but pay tax on the income earned at the end of the scheme.
In the past eight years, these schemes raised about $1.1 billion to $1.2 billion a year, Mr Lee said.
Michael Clark, a spokesman for ITC (Integrated Tree Cropping), a division of Futuris Corp, said that between 65 and 70 per cent of the funds raised went into forestry.
Each year, investment rating firm Lonsec sees between 45 and 55 individual agribusiness schemes planned.
Lonsec head of agribusiness research Jim Blackburn said: "We would shortlist 25 of those for research and end up recommending up to 15 schemes."
(Unless recommended by a research house, a scheme does not get on the list of financial planners.)
Mr Blackburn said these schemes sought to raise from $5 million to $10 million, ranging up to $60-70 million for the largest projects.
Some observers said managed agribusiness schemes had under-performed against other forms of investment.
Mr Lee agreed that the returns had been mixed.
Some had underperformed expectations, yet others had produced "fantastic" results.
To be fair, forestry projects for instance take at least 10 years to mature and longer for the more exotic timber, like teak, sandalwood and mahogany.
Their performance can only be judged after the trees have been harvested.
Mr Blackburn said some of first schemes were just coming to maturity.
So there was insufficient information available from those projects to give a definitive picture on returns.
With more projects nearing the end of their life in the next three to five years, Mr Blackburn said a clearer picture on returns would emerge.
Drought had not helped projects launched before 2000, said analysts, and the issue of water allocation was also a problem for some plantations.
Non-forestry schemes based on grapes, almonds, olives and macadamia nuts also took years to establish themselves before they went into commercial production of oils.
Matt Trewin, a spokesman for Timbercorp, said it could take many years before investors would see returns.
He said that from planting to oil production could take five to seven years for crops like olives and almonds.
However, they were expected to return around 11 per cent after tax each year.
With cattle, however, cash flow could be more immediate as the calves were sold the year after birth, Mr Trewin said.
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