Down on the farm

I’ve just completed an agribusiness project for my brother to offer to a couple of his friends who have expressed an interest in raising cattle. One is a lawyer, another an architect, both of whom have been moaning about changes to the tax laws that prohibit them from ‘hobby farming’ at a loss; and deducting the losses from their professional income. I needed to know who was offering what in the market so that Paull was competitive and so I did some research into the current crop of agribusiness managed investments.

Agribusiness investment in the 21st century suffers from the legacy left by the pine plantations, jojoba and aloe vera schemes that were promoted as far back as the 1960’s and 70’s. I will always remember a consumer advocate on the TV saying “Remember, always check out these type of investments with your accountant and lawyer”, when the main promoters of the schemes were accountants and lawyers who seldom disclosed the 25% commissions they received.

To quote from a special report (AFR 5/6/03) “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 blue gums, 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 1990’s disallowing hundreds of millions of dollars in deductions.”

I suspect however that an even more powerful disincentive to invest has been the changes to the tax laws involving deferral of losses from non-commercial business activities. Under Division 35 of the 1997 Act (“the Non-commercial Loss Rules”), a deduction for losses incurred by individuals carrying on a business (including individuals in general law partnerships) will not be immediately allowed against the individual’s other assessable income unless:
(a) the individual earns at least $20,000 of assessable income from the business in the year the deduction is claimed; or
(b) the business produces a taxable profit in 3 of the past 5 income years (including the current year); or
(c) at least $500,000 of real property (excluding a dwelling) is used on a continuing basis in carrying on the business in that year; or
(d) at least $100,000 of certain other assets are used on a continuing basis in carrying on the business in that year; or
(e) the Commissioner authorises the deduction for the income year.
If the Non-commercial Loss Rules apply, the relevant deduction is in effect deferred until later years when one of the tests is satisfied.

When asked about agribusiness managed investments I have always urged investors to judge the worthiness of the project without any tax benefits. Not many of the ‘old’ type of investments stood that test and indeed few of the more modern investments really measure up either. Agribusiness is high risk. Potential investors should be looking for higher rates of return than they can demand from a lower risk alternative. The major problem is the management fees and establishment costs. Gunns are currently offering a woodchip/wood veneer project at $4,000 per hectare – perfectly reasonable as I have been unable to grow eucalypts in the Adelaide Hills at much less that that. I have, however seen schemes that charge up to $93,000 per hectare for olives and as much as $44,000 per hectare for blue gums.

Another difficulty stems from the application of an ATO product ruling. Simply having a current ruling doesn’t guarantee automatic deductibility and , in the past, some project managers have not executed the project as they told the ATO they would. Hence the ATO has knocked back deductions on projects that had a product ruling.

These days it’s much easier to compare the merits of competing projects because a number of research organisations have sprung up to detail the costs and predicted returns of individual projects. Unfortunately they don’t all offer the results of their research for free, and some prepare research specifically for the scheme promoters so could not be considered completely independent.

Consumers are in a much better position these days because all projects must have a Product Disclosure document which even the average punter can use to determine which method is the best way to lose money.

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