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Australian Investment Authority Issues Warning On Tax Shelters

by Mary Swire, Tax-News.com, Hong Kong

27 August 2001

Tax-driven agricultural investment schemes have been in the news lately, with the Australian Tax Office disallowing deductions on some schemes which did not have valid product rulings, and financial difficulties for some scheme promoters. The schemes basically rely on growing something that takes a long time, whereby you can get tax deductions for the expenses of establishing the plantation (often of pinus radiata, eucalyptus or olive trees) over a period of years, and then sell the investment or its harvest at a time that suits you, tax-wise.

To be successful, apart from the commercial aspect, schemes must have ATO product rulings (or you won't get the deduction) and the promoter must have registered his prospectus with the Australian Securities and Investments Commission (ASIC) in appropriate cases, or the scheme is not legal.

Last week, ASIC published a safety check-list for people considering investments in olive oil agricultural schemes.

'To assist potential investors, ASIC engaged an expert in agribusiness to provide industry benchmarks that are a useful guide to people considering an investment in olives', Peter Kell, ASIC's Executive Director Consumer Protection said.

'Such investments are generally at the riskier end of the spectrum and it's therefore important for consumers to understand what they might be getting into.

'The benchmarks provide a guide to people who are considering an investment in this currently popular area. They will help people determine the risks involved and the merits of claims of various schemes.

'They are not a substitute for seeking appropriate professional advice as to the suitability of the investment for a person's particular needs and financial circumstances.

'Olive schemes have been a popular investment in the mass-marketed tax effective agricultural sector over the last couple of years. However, it must be remembered that an investment in a tax effective investment should never be based solely on the tax benefits which may arise from the investment.

'ASIC advises potential investors to seek appropriate professional advice on the suitability of such an investment for them, and to also remember that ASIC does not approve the viability of any particular investment', Mr Kell said.
Olive Scheme Industry Guide

ASIC asked an agribusiness expert to set out some key trends in the olive industry. These industry facts are set out below, and should be understood by all investors who are considering an investment in an olive scheme. They include:

  • In the hierarchy of agribusinesses, olives are high risk.
  • The current production of olive oil is growing at a greater rate than consumption.
  • Over a ten-year period (1990-2000) the price for olive oil on the Milan Bourse (the major trading centre for olive oil) fell 50 per cent in real terms (from AUD$8 to AUD$4).
  • The European Union subsidy of about AUD$1.50 per litre for olive oil is unlikely to be lifted in the near future.
  • In assessing the Australian industry's viability, it is recommended that a potential investor should focus on Extra Virgin Olive Oil for export rather than import replacement.
  • An established Olive Plantation may be expected to sell for about $20,000 per hectare, compared with an established cool climate vineyard that would sell for around $60,000 per hectare (assuming potential purchasers are seeking the same returns).

In addition to the industry facts, a number of other issues should be considered when assessing a particular olive scheme. These include that:

  • Benchmark operating costs should be between $8,000-10,000 per hectare on a minimum area of 100 hectares to achieve reasonable economies of scale.
  • Set-up costs for infrastructure will be in the range of $16,0000-20,000 per hectare.
  • CPI index adjustments should not be factored into future price calculations given the fall in historic prices.
  • Optimum tree density should not exceed 330 trees per hectare for Extra Virgin Olive Oil production, and this should produce about 15-19 tonnes of fruit (for irrigated groves) with an oil extraction rate of about 16-24 per cent.
  • Extraction rates are highly variable and forecasts should assume a variance of up to 15-20 per cent ratio of oil yield to gross fruit intake.
  • The Barnea olive tree is regarded as 'marginal' variety when seeking production of Extra Virgin Olive Oil and it does not have the same reliable link to the world price for Extra Virgin Olive Oil as, for example, Tuscany-based varieties such as Frantoio, or Manzarillo.
  • The location of the project and the type of olive tree cultivar selected may have a significant impact on oil production and project economics; generally, the further north the location in Australia, the more significant this issue becomes.

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