In the weeks leading up to the end of the tax year, scores of accountants and financial advisers will buy interests in such things as timber plantations to mitigate mounting tax bills for clients.
Some say that, as far as tax deductions go, agribusiness investments are about as good as it gets. Investors wanting to save tax can buy either geared or agribusiness investments. If you invest $100,000 into a geared investment, such as a margin or capital-protected loan, at 10% yearly interest, you could claim $10,000 as a deduction on your tax return this year. But with agribusiness projects, the total cost of the investment, or the full $100,000 invested, is potentially tax-deductible.
You have to borrow a hell of a lot of money in a geared investment to get a decent-sized tax deduction. Indeed, an investor would have to borrow $1 million to invest into shares or property to obtain an equal-sized tax deduction from an agribusiness scheme.
The tax benefits of agribusiness investments are certainly a plus and a big selling point for financial planners and accountants, who are the promoters’ primary channel for sourcing new business.
Agribusiness investments are also uncorrelated with the property or sharemarket cycle, thereby providing diversification in an investment portfolio.
Critics are quick to point out, however, that advisers have alternative reasons for pushing agribusiness products to clients. With commissions paid to advisers ranging anywhere from 4% to 10%, there are glaring incentives for advisers to recommend agribusiness products ahead of more mainstream managed funds and shares.
The uncertainty of returns on agribusiness investments are probably the biggest worry for investors. To plant, maintain, harvest, woodchip and export a timber plantation, for example, can take 10-25 years. Investors will not, therefore, receive their money back until the process is completed.
The decision to invest in an agribusiness scheme should be accompanied by a thorough understanding of the risks involved. Agriculture across the board is notorious for the volatility of its returns. Environmental factors such as drought, disease and natural disasters – as well as volatility in commodity prices and costs, including oil prices affecting the cost of transport – can severely reduce the return on your investment.
Although it is impossible to predict future risks, some commodities, such as wine, tend to exhibit heightened price and yield volatility than, say, woodchips (the present wine grape glut in Australia is a good example). More established agribusiness managers are also better equipped to manage future risks, such as cost blowouts, than smaller or less-experienced players.
Because of the risks involved, some financial advisers refuse to offer agribusiness investments to clients. Compared with shares and property, agribusiness is a “tiny” asset class that is under-researched and plagued by a litany of unsuccessful schemes.
When choosing an agribusiness scheme, big-ticket items for a manager include a successful track record, a ready market to sell the commodity after harvest, and a product ruling from the tax office (check the tax office web site).