Investment schemes that promise big returns from livestock, horticulture, farming or forestry projects are currently estimated to be worth $8 billion but are they worth the risk?
Three years ago over 60,000 small investors lost well in excess of $1 billion of their savings when several major agribusiness investment schemes, namely Timbercorp and Great Southern collapsed.
ASIC has finally introduced a new guide for investors looking at agribusiness schemes but do the new guidelines make such schemes any safer and are they ever a good place to put your money?
So what exactly is an agribusiness scheme?
They are schemes that give you the opportunity to invest money and aquire a right to make profits from the produce of the scheme. For example, a right to share in the profits from olives harvested from an olive grove scheme.
You pay an upfront fee and annual fees for the privilege to cover the costs of running the scheme. The scheme is run by a “responsible entity” but your fees may also be paid to advisers and promoters.
You should receive your returns as a single lump sum or in instalments after a number of years. Lump sums are usually paid for forestry schemes as there’s no return until the timber is sold. For schemes such as olive groves you could start to receive payments from the time of the first olive harvest.
How are they different to other investments?
Here are the main differences, according to ASIC
- Your investment doesn’t entitle you to ownership of any assets, such as the land or planted trees. That means if the company collapses or the scheme fails before the produce is harvested, your investment may be worthless.
- The paperwork is complex. You have to enter into legally binding contracts with service providers to, for example, purchase the trees, tend the plantation and harvest the produce. You usually have to give the responsible entity power of attorney to enter these contract on your behalf
- The investment timeframe is very, very long. You may have to hold on to your investment for 20 years before you see a return
- There’s no secondary market. These schemes are not listed on a market like the ASX so there’s never an opportunity to on-sell if you need to get your money out early.
- Their big selling point is that management fees and interest on any loans you take out to invest can be tax-deductible. However, this is only the case if the responsible entity has obtained a product ruling from the ATO and if it sticks to that ruling throughout the life of the scheme. It’s a risky proposition if your main reason for investing is the tax benefits
What is ASIC doing to protect investors?
If you haven’t been turned off by the risks outlined above, ASIC has finally introduced some measures to help small investors assess the risks involved in agribusiness schemes. Information about how each scheme does or doesn’t meet these new “benchmarks” should be included in Product Disclosure Statements (PDS) for agribusiness schemes.
- Fees: scheme providers will have to spell out whether their fees will cover all expenses and whether they’re held separately and only used for the scheme’s operation. Only invest in funds that meet these requirements
- Ownership: the responsible entity and any related parties should own no more than a 5% interest in this scheme. This ownership interest needs to be explained in the PDS. If they own a large interest in the scheme and then get into financial trouble it may not be able to meet its share of ongoing expenses and might drag the scheme down with it.
- Annual reports: the scheme operator needs to undertake to provide you with the following information annually: the scheme’s cash position and annual expenses; performance relative to expectations, current prices and market conditions of the produce; an update on the financial position of the responsible entity; and the impact of any regulatory changes.
- Experts: only qualified, accredited experts should be used by the scheme to provide expert or professional opinions that investors can rely on. Those qualifications and accreditations should be spelt out
- Service providers: you should also be given information about how service providers are appointed and managed so you know they’ll be accountable.
In addition to the benchmarks ASIC is now requiring agribusiness schemes to spell out information about :
- Finance: if you’re offered a loan in order to invest you should be told exactly who is providing the finance and whether the scheme operator receives a fee if you take out the loan.
- Other schemes: whether the responsible entity runs any other agribusiness schemes and how they’ve performed
- The underlying business: make sure the responsible entity is well-resourced as a going concern and not heavily reliant on external borrowing to fund its operations
- There should be clear agreements in place to secure the land, resources and water needed to run the scheme
- You should be given a clear understanding of what will happen to the scheme if the responsible entity is replaced or fails
Still feel like getting a little dirt on your hands? Proceed with caution.
Collections: Mortgage News