Agricultural investment schemes
How some of these schemes operate
In livestock schemes like ostrich or emu farming you usually buy one or more animals and pay regular fees to a manager to look after the animals and sell them. You rely on the manager's efforts for any profit.
In horticultural and forestry investment schemes, which include pinus radiata, blue gums, tea trees and flowers, you usually lease some land that is used to grow the tree or plant. The promoter or manager is responsible for planting, maintaining, harvesting and sale of the crop.
How safe is your money?
Many of these schemes lose all or some of your money or fail to make a better return than money in a bank account. Crops can fail and plants and animals can lose value as more people invest in them. Of course some schemes will succeed but you need skill to pick the good ones, and even experts make mistakes.
Tax traps
You can only get tax deductions for the interest you have paid on borrowed money if the asset is intended to produce an income. If there is no income from the scheme, the Australian Taxation Office (ATO) could decide the scheme was not really intended as an income producing asset. It would then disallow your tax deductions and you would have to pay them back.
Tax-driven schemes usually take a long time before they earn any income (5 to 20 years). If you get all your tax deductions in the first year, any income you earn later is taxable.
If the scheme goes well, you are very likely to be left with a large tax bill that you didn't plan for when the investment matures. These schemes are not usually tax saved, just tax postponed.
Borrowing money through 'non-recourse loans'
Many of the agricultural schemes (also known as primary production schemes) arrange finance for you to invest in the scheme.
The prospectus or product disclosure statement (PDS) generally says that as long as you perform all duties set out in your loan agreement, the repayments of the loan and interest will come from the farm's income. If there is not enough income from the farm, the lender has 'no recourse to you personally', in other words, you are not personally responsible for the repayments.
Get legal advice before entering one of these agreements. The ATO may query the tax deductibility of the loan interest if the investor appears not to be taking any real 'business risk'. Visit the ATO's website to read the latest developments.
Leases not always safe
Agricultural schemes usually grow the product on land which the grower leases but does not own. The land could be sold or mortgaged without any notice to you, unless the lease is registered on the land title, or some form of caveat (a special warning clause) is placed on the title. Without this safeguard, you could lose your investment.
Information before you invest
Before you consider investing, ask the scheme promoter for their current product disclosure statement (PDS). More on PDSs. Check whether a replacement or supplementary PDS has been issued.
Get advice from your professional taxation adviser - not the same person who is promoting the scheme. Get legal advice about the agreements you are required to sign. You will be signing binding contracts in order to make this investment.
What if there is no PDS or registered managed investment scheme?
Sign nothing. Do not invest until you check with our Infoline by email whether this particular investment needs one.
Reputation of the salesperson
What authority does the adviser have to sell this investment? Are they licensed or authorised by someone who holds a licence? What commission or financial benefit does the salesperson receive if I buy the investment? You have a right to know.
What is the reputation of the managers of the scheme?
If your investment is going to profit, the product must be managed and nurtured for the full term of the investment. If the manager fails to manage the project adequately or becomes insolvent, the product will probably not reach maturity. You need to know about the reputation of the manager and the arrangements to see that the manager stays involved and properly cares for your investment.
Fifteen questions to ask about a scheme
| 1 | Is there any mortgage or other form of security taken over my investment? |
| 2 | Is there an Australian Taxation Office opinion about the tax deduction available from this investment? Can I have a copy of that opinion? |
| 3 | What does the State's Agriculture Department say about growing the type of crops in the region specified for investment? |
| 4 | Can I sell my investment before the end of its term? |
| 5 | Is the return from my film investment guaranteed? If so, has the letter of credit securing that guarantee been signed before I invest and can I have a copy of that letter of credit? |
| 6 | At the end of the investment period, what do I own? |
| 7 | What is the net present value of my projected return from the investment? (Tests the buying power of the future income.) What discount rate does this projection use? |
| 8 | Do I actually need to be personally involved in the scheme activity? |
| 9 | Has a caveat or similar security been lodged over the land I have leased under this scheme? |
| 10 | What happens to my investment if the landowner sells the property where my product is growing? |
| 11 | Is there any mortgage or other security held over the land by any third party? |
| 12 | What agreements are in place with buyers for the commodity I am producing? |
| 13 | Are the agreements at arm's length and on commercial terms? |
| 14 | What contingency plans are in place for continuous management? Has any money been put aside in case the manager fails? |
| 15 | What assessable income, taxation and cash flow outcomes do I face when my investment matures? |
Before you sign
Wait! Do not make a verbal agreement to invest. Do not sign up for the investment at the first meeting with your adviser. Get answers to your questions in writing. Check that the written documents contain a full discussion of all the risks involved with the investment.
Are you happy that:
- the scheme suits your particular situation
- you know what all the terms used mean
- everything makes sense to you, and
- you understand all of the risk of the investment?
Keep copies of all documents
Keep copies of all documents you are given and documents that you sign. It is your only evidence if something goes wrong in the future.
More information
FIDO Website: Printed 02/09/2010
