Don’t be drawn into “pulp fiction” when it comes to investing in woodland and forestry schemes, a Midland financial adviser has warned.
Will Self says unwary individuals who base their strategy on the desire to minimise tax risk have to learn a painful lesson.
“Clearly understand what you are investing in, ensure the rewards you are seeking are commensurate with the risks you are adopting, maintain a long-term approach and take advice only from a professional whose interests are aligned with yours, not with those of the product provider,” the managing director of Stratford firm Self Financial Planners said. “It’s an old story, but a true one. The rest is just pulp fiction.”
Mr Self’s comments follow the collapse of Australian agricultural investment groups Great Southern and Timbercorp owing creditors billions of dollars and leaving tens of thousands out of pocket.
Both operated so-called managed schemes that packaged forests, horticultural products and cattle as investment products and sold them to retail investors.
These schemes proved popular with many Australian investors because they provided generous tax breaks that the government allowed as a way of channelling investment capital to rural businesses. The investments were marketed to investors through accountants and financial planners, who received incentives from the company sponsors in the form of generous commissions, sometimes of up to 18 per cent.
“But when the world recession hit it all came down like a pack of cards,” Mr Self said. Timbercorp was felled with net debts of A$903 million and 18,500 investors were affected, while Great Southern collapsed owing up to A$4 billion to more than 43,000 individual investors.
Mr Self pointed out that the UK has similar tax breaks on woodland and forestry while Enterprise Investment Schemes and Venture Capital Trusts “all fall into the same bracket”.
“I am not saying these are likely to fail in the same way the Australian companies have, but I do believe investors need to be careful,” he said.
“It highlights some long standing lessons which need to be remembered.
“Firstly, when you make your priority in choosing one investment over another its success in minimising tax rather than maximising after-tax return, you are failing to see the wood for the trees, so to speak. You end up with investments that are not about the success or failure of the underlying business, but about the ability of the promoters to milk the system for tax advantage. And that tax advantage is always liable to disappear if the government changes the rules.
“Secondly, there are risks in taking a short-term approach to investment. In most cases, the people putting money into these schemes in Australia were focused principally on making an end-of-the-financial-year tax problem go away. Thirdly, when you accept recommendations on investments from people motivated by the substantial commissions they receive, you increase the risk of being put into a scheme that is inappropriate for your own particular circumstances.
“No matter how much these facilitators say they have their clients’ best interests at heart, the fact is the conflicts of interest are so entrenched their advice cannot but fail to be compromised.
“Finally, it is a good rule of thumb when making any investment to ensure you understand what it is you are committing your hard earned money to.”