Issue No 10, July 1998.

NOTICE: Hard copies of the Australian New Crops Newsletter are available from the publisher, Dr Rob Fletcher. Details of availability are included in the Advice on Publications Available.

2. The appeal of new industries

During the month of April, 1998 a series of bogus advertisements was placed in newspapers, on radio and TV by the Australian Securities Commission which is now known as the Australian Securities and Investments Commission (ASIC).

The advertisements described opportunities to invest in new industries and invited interested parties to ring a 1300 telephone number for further information about bluebottle farms, goat/sheep cross breeding programs and land and airspace packages (these are slow-loading links).

There were 872 responses from investors interested in schemes they obviously knew little about.

The ASIC has expressed concern about the vulnerability of some investors to new industry advertising and has released some advice on how to combat unscrupulous operators. 584 of the investors who called the ASIC about the advertisements agreed to accept information about how to reduce their risk when investing.

This information has been extracted from conversations with and material supplied by officers from ASIC in Brisbane and was initially prompted by an article by journalist Chris Griffith in the Sunday Mail, Brisbane.

The Australian Securities and Investments Commission (ASIC) has released the following general advice pertaining to the setting up, running and closure of companies.

• The name of the company needs to be registered and an Australian Company Number (ACN) obtained.
• A registered office must be set up in Australia. The company name is required to be displayed prominently at every place where business is carried on. It must be open to the public. It is not necessary that the sign be displayed outside, a sign inside the premises will be sufficient.
• The company name, the words "Australian Company Number" (or an approved abbreviation) and the ACN number need to be displayed on:

• Annual return forms and fees need to be lodged by 31 January of the next year.
• Company registers of members, option holders (if appropriate), debenture holders (if appropriate) and prescribed interests holders (if appropriate), minutes of general meetings, minutes of meetings of directors and a register of charges created by the company over company property need to be kept.
• Accounting and other records sufficient to enable the financial statements to be prepared and audited should be retained for at least seven years.
• Company records need to be kept at the registered office.
• The ASC needs to be informed of:

For further advice, contact the ASIC Infoline 1300 300 630.

Primary production investment schemes include such opportunities as ostrich, emu or crayfish farming, sheep or cattle embryo production, blue gum, pine or tea tree plantations, flowers or the production of hydroponic horticultural crops, such as strawberries.

In the livestock investment schemes, the investor buys animals and pays regular fees to a manager to look after the stock, selling them when appropriate. The efforts of the manager are often directly related to the level of profit realised.

In the horticultural and forestry investment schemes, the investor leases land that is used to grow the crop. The promoter or manager is responsible for planting, maintaining, harvesting and selling the crop.

The reputation of the managers of any investment scheme will directly impinge upon its value as an investment. If an investment scheme is to show a 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.

Pooled or collective agricultural investment schemes such as these, which involve the pooling of money from numerous people, usually qualify as a type of security called a managed investment scheme.

Managed investment schemes are regulated by the Corporations Law, which is administered by the Australian Securities and Investments Commission. A managed investment scheme brings together a group of people who expect to earn a profit from the efforts of a manager or third party.

Managed investments include cash management trusts, property trusts, equity (share) trusts and agricultural schemes involving livestock, forestry or horticulture.

Investment in schemes such as ostrich farming often involve the investor
purchasing livestock and paying a manager or promoter on-going fees. The investor relies on the promoter's efforts for any profit. The nature and extent of the promoter's services and efforts can qualify the scheme as a managed investment if, for example:

• 'free' agistment, veterinary, husbandry or other services are included in the purchase price;
• there is replacement of the livestock at less than the current market price, in the event of any deaths;
• there is a right to sell the livestock for a guaranteed minimum profit; and
• there are restrictions on an owner's ability to remove livestock from the care or control of a service provider.

This list is not exhaustive and whether a particular scheme is a managed investment will depend on the terms and conditions of the contract signed. Schemes that offer the sale of livestock only are not managed investments.

Schemes in which investors lease land on which a promoter or manager is responsible for planting, maintaining, harvesting and selling horticultural or forestry products are generally managed investments.

Agricultural managed investment schemes such as these are often tax driven. They offer the investor a substantial tax deduction in the first year and smaller deductions during the project's life. Such schemes are usually marketed towards the end of the financial year.

Promoters who offer such schemes are required to abide by the conditions of the Corporations Law. If not, they face prosecution. If found guilty, the contract with the investor may then be unenforceable and the promoter may be liable for damages as a result of losses suffered by investors.

Legal advice should be sought on structuring a pooled investment scheme before making any offers to investors.

Before investing in such schemes, advice should be sought from a licensed investment adviser. There is also the need to determine whether there are yearly maintenance fees and how long the investment needs to be in place before producing satisfactory returns.

For a multitude of reasons, many investment schemes have lost some or all the money invested, or have failed to make a better return than otherwise could be realised from deposits in a bank account. Crops can fail and plants and animals can lose value as more people invest in them.

Some schemes succeed but skill is required to pick the good ones. Experts themselves can make mistakes.

One attraction of such schemes is the opportunity to manage tax obligations more expeditiously. An investor can claim tax deductions for the interest paid on borrowed money if the asset is intended to produce an income.

However, if there is no income from the scheme, the Australian Taxation Office can decide the scheme was not really intended as an income-producing
asset, thus disallowing the tax deductions.

As well, if the tax deductions are taken in the first year, any later income earned is taxable. Many agricultural tax-driven schemes can take a long time to earn income, perhaps as long as 5-20 years.

Some primary production investment schemes arrange the finance for the investors in the scheme. The prospectus generally states that so long as the investor performs all duties set out in the 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 the investor personally, meaning the investor is not personally responsible for the repayments.

This kind of 'non recourse' loan has not yet been tested in the Courts although recent statements by the Australian Taxation Office appear to indicate that investors claiming deductions in these circumstances may have their returns scrutinised.

As with all such arrangements, the best advice is to seek professional legal advice before entering one of these agreements.

Primary production schemes often grow the product on land which has been leased. Unless the lease is registered on the land title, or some form of caveat or warning clause is placed on the title, the land can be sold or mortgaged without any notice to those who have the lease.

Any primary production scheme requires a current prospectus, registered by the Australian Securities and Investments Commission. The registration process is no guarantee that the investment is good but indicates that there does not seem to be any information left out.

A prospectus must give potential investors all the information which could reasonably be required to make an informed decision about the investment concerned. A prospectus usually has a life of twelve months, with an expiry date.

Again, the best advice is to seek professional advice from experts other than those promoting the investment scheme. It is important to get legal advice about any agreements before signing them. There will be binding contracts to sign in order to invest in these primary production schemes.

If there is no prospectus or trust deed, the Australian Securities and Investments Commission Hot Line (1300 300 630) is available to advise whether the investment requires such documents.

The types of questions that potential investors should ask about any primary production scheme should include:

1. Is there any mortgage or other form of security taken over the investment?
2. Is there an opinion available from the Australian Taxation Office about the tax deduction available from the investment and is a copy of this opinion available to potential investors?
3. Can the investment be sold before the end of its term?
4. At the end of the investment period, what does an investor own?
5. What is the net present value of any projected return from the investment? This tests the buying power of the future income. What discount rate does this projection use?
6. Does an investor need to be personally involved in the activities of the investment scheme?
7. Has a caveat or similar security been lodged over the land to be leased?
8. What happens to the investment if the landowner sells the property which has been leased?
9. Is there any mortgage or other security held over the land by any third party?
10. What agreements are in place with buyers for the commodity being produced? Are these agreements on commercial terms and legitimate?
11. What contingency plans are in place for continuous management? Has any money been put aside in case the manager fails?
12. What assessable income, taxation and cash flow outcomes will occur once the investment matures?

It is also important to establish whether the salesperson has the authority to sell the investment being considered. Is the salesperson licensed or authorised by someone who holds a licence? What commission or financial benefit does the salesperson receive when someone makes an investment?

The Australian Securities and Investments Commission advises potential investors not to make a verbal agreement to invest and not to sign up for any investment at the first meeting with the salesperson or investment adviser. Answers to all questions should be obtained in writing and all documents should be checked to ascertain whether they contain a full discussion of all the risks involved.

1. Does the scheme suit your particular situation?
2. Do you know what all the terms used in the documents mean?
3. Does everything make sense?

It is important to keep copies of all documents collected and all documents that have been signed.

For further information about companies contact the ASIC Infoline (1300 300 630) the ASIC home page on http://www.asic.gov.au or ASIC Business Centres.

Contact: Dr Rob Fletcher, School of Land and Food, The University of Queensland Gatton College, 4345; Telephone: 07 5460 1311 or 07 5460 1301; Facsimile: 07 5460 1112; International facsimile: 61 7 5460 1112; Email: r.fletcher@mailbox.uq.edu.au

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originally created by: GK; latest update 6 June 1999 by: RF