The new public market for agricultural tax (MIS) schemes follows government concern over fees, prices and a lack of transparency inside the sector, the Minister for Revenue, Peter Dutton, has told Eureka Report.
In today's video interview, Dutton singles out “bad operators” in the MIS (Managed Investment Schemes) sector, who he hopes will be weeded out by the creation of a fully transparent, liquid market for MIS investments to be launched later this year.
Dutton has little praise for the existing industry, dominated by companies such as Great Southern Plantations, Timbercorp and Willmott. And although the stock prices of key operators such as Great Southern have been rising since the new market was announced in the federal budget, Dutton focuses on the failings of MIS schemes and his attempts at reforms though the creation of a secondary market. He says: “The idea is to try to introduce transparency into the market, have some liquidity in the market and have a situation where we can get some transparency into the pricing.”
Many Eureka Report subscribers will have interests in MIS schemes. Not everyone will make money. To read the industry's response to the new secondary market, see Timber futures' good news from Eureka Report last week, but it is clear from today's interview the industry may be facing a new push for reform.
The interview
Michael Pascoe: What are the policy aims in developing a secondary market for timber Managed Investment Schemes?
Peter Dutton: Well Michael, the idea is to try and introduce transparency into the market, have some liquidity in the market and have a situation where we can get some transparency into the pricing. We’ve had a concern in relation to many of the management fees that have been charged in this particular sector. We’ve had concerns about prices that consumers are paying at market and we believe through a secondary market arrangement that there will be some more transparency in the process and that, I think, is a good thing for investors in the long run in particular.
P: So there is a belief in parts of the Government that people are being lured into dud investments by that tax dodge up the front?
D: Well, I think what people in Government and in the sector realise is that there are good and bad operators like in any marketplace. Some people have very good returns on investments. Some people have better products in the ground than others. Some products are in more marginal country than others and they have different outcomes when the trees eventually are harvested, but what we do want to do out of this process is make sure that we’ve got markets and experts looking at the way in which these products are priced so consumers can have greater confidence in what they’re paying.
P: The industry seems to have seized on this idea as if they’re going to get a second bite of the cherry.
D: Well look, I can’t talk for the industry. All I can talk about is the motivation from a Government point of view and really from my perspective. I’ve looked at this. We didn’t want to get into an arbitrage situation. We didn’t want to get ourselves into a situation where people were trading in tax credits or anything like it so we’ve got some pretty stringent requirements in there. People have to hold their initial investment for a minimum four years and the ultimate aim, as I say, is to make sure that we’ve got as much transparency in the products, so that we have – wherever is needed – a rationalisation in the pricing.
P: There’s some uncertainty about how it will work … Hold it for four years. That extinguishes the tax benefit?
D: If people at the moment dispose of their share, and generally you’re talking about a distressed seller. Somebody generally again related to the promoter or to the person that’s put the product to market would purchase back that arrangement and, generally speaking, people would then forgo their taxation arrangements and the concessional arrangements that had been given to them to buy the product upfront. So that exists at the margins in the scheme at the moment. If people traded [after] less than four years then they would have their tax concessions forfeited, but as we go forward, if people have held the investment, the initial investment, for a period of not less than four years and they would be entitled to the upfront deduction and there would be transparency in that process going forward as well.
P:The pricing of the secondary market – what are you looking for? Isn’t there a danger that some of the promoters who are doing so well out of fees in promoting the tax side of it could pervert the market?
D: We’ll have some transparency of our own. We’ll be looking at what is a fair market price for these things to be traded so that we don’t have tax credits being passed from a primary to a secondary investor and the ATO will monitor that very closely, so it will be a true market value that’s paid for the product. People – analysts – will be looking at these products to see whether or not there is good value in the product that’s being offered to market and ultimately the sophisticated investors in particular, who will scrutinise these products, very quickly will soon tell us whether or not they’re good value for money.
P: Well, physically how would it work?
D: Physically how it will work is that people will conduct themselves on a secondary market, I would have thought, on a secondary exchange. We would have the capacity for institutional investors, for argument’s sake, or sophisticated investors or analysts in the marketplace to look at particular products and we would from there seek to marry up the buyers and sellers. So it would operate in a similar way to exchanges at the moment.
P: Are you looking to nominate an exchange to have that job or is the field open now?
D: I don’t think we’ve gone that far. We’ve spoken to some players in the market who believe that they could facilitate the process quite quickly.
P: Sorry. Players in the market. You don’t mean the big promoters who are already out there?
D: No, I’m talking in terms of exchanges and people who are bona fide operators at the moment, operating some of the biggest exchanges in the country. So that’s a detail that we need to work through but the important thing is to make sure that we’ve got the analysts looking at these products, to look at present values and future values and where opportunities might vest in some of these products, and they’ll soon discard the ones that don’t.
P: In the work you’ve done in developing this policy, what sort of expectation has built up about what these products will trade at in the secondary market as opposed to what they’re being sold for in the first instance?
D: I’ll let the market decide that. I’ll let the market determine what is good value and what’s not and they will soon let the market know what they’re willing to pay and I think that’s a good way in which it can operate.
P: But you can see some expert opinion on what it’s likely to be, in light of Great Southern’s experience and shortfall in returns and having to top up what’s paid to investors?
D: Well Michael, I know where you’re headed but I can’t pre-empt any of the market outcomes. I think it’s important that we have transparency in the process. We need to have people looking and independently analysing some of these products and I think there will be some that do better than others. Clearly that will be the case and we’ll see what the future holds.
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