Tax Industry Insight:

Institutional Investment in Agribusiness

28 May 2018

Superannuation funds have traditionally invested very little, if at all, in agribusiness. BDO, through its industry expertise and successful history lobbying government, has some ideas that may incentivise superannuation fund investment in agribusiness.

Foreign investment review board

On 1 February 2018 the Treasurer announced important updates that will impact how foreign investors can acquire agricultural land in Australia where approvals from Foreign Investment Review Board (FIRB) are required. Going forward, foreign persons seeking approval for the acquisition of Australian agricultural land will, in the absence of exceptional circumstances, need to demonstrate to the FIRB that the land has been part of a public sales process and marketed widely to potential Australian bidders for a minimum of 30 days, and that Australian bidders have had an opportunity to participate in the sales process. The policy underlying this requirement is a desire to ensure that Australian investors, including superannuation funds, have a sufficient opportunity to bid on proposed sales of agricultural land.

Encouraging superannuation fund investment

Pressure has been building on Australian Super Funds to invest and on vendors selling major agribusiness assets to be able to demonstrate that Australian Super Funds have had the opportunity to buy the assets. The Treasurer’s requirement that major rural assets need to be publicly advertised increases the level of debate.

Superannuation funds have traditionally chosen to not invest in agribusiness, or underinvest, for a number of reasons, including:

  • Perceptions about low risk returns for agribusiness investment
  • Short term investment horizons
  • Low liquidity of investment
  • Lack of investment managers with in-house agribusiness expertise
  • Negative experience from past agricultural investments marketed to external investors.

BDO has ideas for tax reform which may assist with Australian Super Funds increasing their investment in agribusiness.

BDO ideas for tax changes to assist with cash flow management

Agribusinesses typically have large capex requirements for land, stock, and plant and equipment. At present, there is no tax relief for the cost of farmland used in operations and the limited tax relief for purchased livestock is often deferred for many years. Consideration should be given to providing some form of tax relief for agribusinesses operating in these circumstances to provide a level playing field when comparing agribusiness to other forms of business investment.

To prevent ‘land speculators’ bidding up the cost of farm land, integrity measures should be put in place to ensure farmland is available for farmers to acquire at a price based on sound economics. Improving the after tax cash flow of an agribusiness will further help to improve the return on investment for superannuation funds.

BDO supports farm machinery being eligible for the proposed Australian investment guarantee (AIG) which would allow businesses to immediately write off 20% of their investment in new and upgraded assets worth more than $20,000. This type of arrangement is known as accelerated depreciation or instant expensing. BDO suggests that the Government adopt the Labor Party’s AIG which is proposed to start from 1 July 2020 and allow businesses to deduct up to 20% of the value of new eligible investment valued at over $20,000 (with no pooling of assets allowed) in the first year, with the balance depreciated in line with normal depreciation schedules from the first year. Eligible assets include tangible machinery, plant and equipment, non-passenger motor vehicles and intangible investments in knowledge assets such as patents and copyrights.

BDO ideas for tax changes to assist with liquidity of investment

Limit dividend and interest withholding tax

BDO note that the Government’s stapled structure integrity exposure draft law released on 17 May 2018 seeks to limit the foreign pension fund withholding tax exemption for interest and dividends to portfolio investments (i.e. where a foreign pension fund investor holds an ownership interest of less than 10%) from 1 July 2019. The change is likely to impact rates of return which may mean that certain foreign investors need to sell down their investments during the transitional period and consider exit strategies.

The Government’s stapled structure integrity package also includes a measure to prevent agricultural MITs from accessing the lower 15% concessional tax rate, which will assist with providing a level playing field for agribusiness. We note however, that there is no detail in the announcement as to whether the removal of the 15% MIT withholding tax rate will only apply to agricultural land in a stapled structure or whether the proposed measures will also apply to single MIT structures that hold agriculture land and derive rent from third parties and await clarification from the Government.

According to the Treasurer’s accompanying media release, “draft legislation on the agricultural MIT changes and the conditions stapled entities must comply with to access the infrastructure concession and/or transitional arrangements will be released in due course”. BDO awaits the draft law on agricultural MIT changes.

Pooled superannuation funds

BDO believe that the existing Pooled Superannuation Trust (PST) regime could be opened up to allow units to be held (up to a pre-determined limit) by exempt foreign pension funds.  Presently all units in such vehicles must be held by Australian complying superannuation funds/the complying superannuation business of a life office etc.

Where FIRB approval is provided for an investment, foreign pension funds could be allowed to own (up to an agreed percentage e.g. 15%/20% of issued units) units in a PST whilst allowing the PST to maintain its tax concessional status. We would envisage the other units being available for purchase by Australian superannuation funds including; Retail/Industry/Public Sector/SMSF.  This will allow large agribusinesses to be jointly owned by Australian and foreign superannuation funds whilst keeping the underlying business intact and preserving the synergies (such as geographical spread and management expertise) of that business. 

The pension exemption should not be made available to foreign pension funds thereby ensuring income referable to those funds is taxed at 15%.  Also the tax rate applicable to the exempt foreign pension funds would be in-line with the rate applying to the Australian superannuation funds, being 15%.  That is, from an Australian perspective any tax advantage/detriment between foreign and local buyers is eliminated.  Further the applicable rate is set at 15% being the rate currently available for real property acquisitions structured through Attribution Managed Investment Trusts (AMIT). Whilst other asset disposals may be tax exempt to foreign investors, the underlying tax exposure of 30% throughout the holding period remains a permanent cost.  Hence the proposal provides a simple 15% rate throughout the holding period and on exit (i.e. excess tax is refunded via refundable franking credits) without the need to enter into complex structuring options.

By allowing a particular level of foreign investment (by foreign pension funds) without upsetting the concessions otherwise enjoyed by Australian superannuation funds and by allowing foreign pension funds a similar tax profile, effectively the foreign pension funds would be incentivised to invest with Australian investors. Australian funds may be more willing to invest in such long term agricultural investments where they are able to leverage the agribusiness investment experience of foreign pension funds and are not required to commit funds under management that is in excess of their current allowed allocation and thereby allow the long term economic benefits of these investments to remain with some Australian ownership.

These changes may assist with improving liquidity of investment as Australian funds could sell their PST units to another superfund which is easier than a sale of an entire, albeit smaller, agribusiness.

Furthermore, easier access to large agribusinesses may also improve the return on investment for Australian superfunds investing in agribusiness as larger agribusinesses are typically more geographically diverse with strong management, which generally results in more consistent and stronger profits compared to smaller single geographically located farming operations.

BDO ideas for tax changes to attract talent to regional Australia

Agribusinesses often find it difficult to attract talent to work in regional Australia and they often have to compete with the mining industry to provide competitive salaries making it more difficult to attract the right people prepared to relocate to work in agribusiness in regional and remote locations.

Some concessions that could be provided to increase the attractiveness of working in the agribusiness industry in a regional area are:

  • Exempting individuals who work in an agribusiness in a regional area from the luxury car tax as the cost of travel is a major consideration for people living and working in remote locations and who often require a more substantial vehicle that can handle the rigours of long distance travel. The current luxury car tax threshold of $63,184 and $75,375 for fuel efficient cars should be removed for individuals that qualify for an exemption.
  • Providing HECS relief for individuals who choose to work in agribusiness whilst they work in regional centres to attract younger and more mobile people to consider working in agribusiness.
  • Providing individuals with a significant tax rebate for working in remote areas in agribusiness.  The current remote area rebate is inadequate, outdated and only targets individuals who live in remote areas.  A more targeted rebate should be introduced to encourage work in the industry.
  • Providing agribusinesses with government incentives to employ people.
  • Providing regional scholarships and other funding for students studying agriculture related courses.

An increase in the talent pool available to agribusinesses will ultimately support increased profitability. Some of that talent pool may end up working in service industry roles as well as on the farm, and should ultimately increase the knowledge levels and competency of investment managers working with the superannuation funds and institutional funds, and that in turn will help them in assessing the quality of an investment opportunity into an agribusiness.

BDO can assist investor groups with:

  • Assisting both Australian and foreign investors with making an informed decision about prospective purchases
  • Analysing proposals by foreign bidders which will be subject to FIRB scrutiny
  • Evaluating funding structures to manage risk and optimise returns
  • Working through the tax implications of purchasing a farming operation
  • Complying with reporting and regulatory obligations.