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The offer of a tax break has led to a huge rise in timber production, and it could spell trouble for investors.
Leaving aside English referees and Italian left wingers, there are few things that’ll put an Australian’s back up more than a tax bill. As a nation we’ll seemingly do anything to avoid paying the taxman a share of our hard-earned cash, but to let tax matters dictate investment decision-making is to let the tail wag the dog.
Most investment propositions sound wonderful on the day they’re presented to you, but rarely work out as well as the initial forecasts suggest. But when the primary purpose of an investment is to bypass the taxman, promoters seem to get away with even more outlandish forecasts than usual.
Agricultural products appear to sell best. The tax laws allow a 100% deduction for the upfront investment, after which the revenue is 100% assessable (as opposed to spreading the cost of the investment over its earning life as with most other businesses). The key to making a stack of money as a promoter is to put a lot of time between the punters making their investment and realising they haven’t made a return.
Tidal wave of supply
In the late 1990s, vineyards were the tax deduction of choice. The number of hectares planted each year jumped from 7,825 hectares in the 1996–97 year to 16,048 hectares in 1998–99, a 205% increase over two years (see graph below). Vineyards take a number of years to start producing and then a number more before they reach maturity, so the promoters were able to keep on selling while a tidal wave of supply was already on the way.
The full effects are only now being felt, with prices for wine grapes down 14% in 2005 to chalk up their fourth annual fall in the past seven years. We don’t know of any specific project details but, given the highly publicised troubles of McGuigan Simeon and Evans & Tate, it’s unlikely investors have too much assessable revenue to worry about.
These disastrous returns have put vineyards on the nose, so the tax ‘savvy’ are looking elsewhere. We think they’ll lose money there too.
Timber plantations have been around since the mid-1990s. Great Southern Plantations, the country’s largest promoter and manager of timber plantations, sold its first woodlots in 1994. Investors put their money in a managed investment scheme (MIS)—typically a one-third hectare timber plantation—and receive the proceeds of the timber harvest after a number of years. The vast majority of plantations in Australia are hardwood chip plantations with a standard life of 10 years.
Demand for deductions
Ten years gives the promoters a huge head start, significantly more than the vineyards, before the economic realities of their actions hit home. And they’ve certainly taken advantage of it. The number of hectares planted to hardwood timber plantations grew astronomically in the late 1990s, reaching 126,211 hectares in 2000 (see graph above). Investors’ demand for deductions waned a little following the stock market slump of 2002–03 but it has returned in force over the past couple of years.
As with the vineyards, the effect of increased supply isn’t known until the projects are harvested—but you don’t need to be an economics professor to work out it won’t be pretty.
Dr Judy Clark from The Australian National University’s Centre for Resources and Environmental Studies presented some numbers in a recent submission to Treasury. According to Clark, Australia already accounts for a third of the global hardwood chip trade (at the moment mostly from native forests). Hardwood plantation chip exports, though, are expected to grow from 2.2 million cubic metres a year in 2004–05 to an average of 10.8 million cubic metres a year from 2010 to 2014. Including native forests, that will more than double the amount of hardwood chip available for export. It’s an enormous increase in supply, and the Japanese, our main export market, must be rubbing their hands with glee. For investors, though, the results could be disastrous.
Great Southern and similar companies, including, to lesser degrees, Timbercorp and Willmott Forests , have made extraordinary profits over the past decade on the back of a tax-driven boom. Investors are about to start realising their returns, though, and our expectation is that they won’t be coming back for more.
Act of generosity
Note 33 to Great Southern’s 2005 annual accounts contains the following statement: ‘On 29 July 2005 … a wholly owned subsidiary of [Great Southern] purchased all of the timber from the 1994 project for $6.4m.’ That amount was a ‘significant premium to the investors over and above the return they would otherwise have achieved’.
The after-tax expense of this act of generosity was $3m, so we estimate that Great Southern sold the wood it had just bought for about $2.1m—less than a third of what it had paid for it. That doesn’t sound too smart, but in the context of Great Southern’s overall business it makes a lot of sense. That’s because, in 2005, the company sold $304m worth of woodlots and generated a profit of $124m. If the 1994 investors had announced to the world that their returns were a mere third of the forecast returns, we doubt sales would have been anywhere near as high.
This solution won’t work, though, when the bigger projects start to be harvested. The company is predicting the timber yields on later projects will be much higher but, if our predictions about future prices are right, investors are still going to be very disappointed.
We’re not financial advisers, but we suggest you think long and hard about these agricultural products. Approach the forecasts with a healthy dose of scepticism because no tax deduction will compensate you for a serious loss of capital (yes, we know we’re a week late, but the evidence has only recently started to mount up).
We review Great Southern later in the newsletter, but it is already moving into different areas such as almonds and beef cattle. No matter what happens to the plantation industry, there will still be plenty of people willing to lose enough money to avoid the taxman.
If you’re interested in this topic, you might enjoy a podcast from ABC Radio at http://www.abc.net.au/rn/nationa ... es/2006/1630935.htm |
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红石头归来的经验分享。 (2011-7-17) gifox 
发表于 2007-5-2 10:56
