Over the last few years a number of our clients have invested into a variety of Timbercorp projects, including agribusiness, debentures, bonds, unit trusts and Timbercorp ordinary shares. Most people by now would be aware that Timbercorp ordinary shares have dropped substantially in value because of an announcement by the ATO that Non-Forestry projects will no longer be given the tax advantages they previously enjoyed.

At this stage we believe there is some confusion in the market place in regard to the value of the various Timbercorp investment products. At Thornton Group we like to keep our clients fully informed in regard to their investments, and so we felt a statement from us would be welcomed.

Horticultural Projects

Horticultural projects include investments into Almonds, Olives, Table Grapes, Mangoes and Avocadoes. The current decision by the ATO will have NO effect on past or current 2007 projects. All of these projects were issued with an ATO product Ruling which covers the life of the project. The tax advantages previously enjoyed will continue.

On 6th February the agricultural research house Australian Agribusiness Group issued a statement in which they said – “It is important to remember that people investing from now until 30th June 2007 in projects that have or will have a current Product Ruling will still be able to claim deductions as “normal” for the life of the ruling. Investments covered by an existing Product Ruling will not be affected by the changes.”

All projects recommended by Thornton Group were covered by a valid ATO Product Ruling.

 

Timbercorp Debentures and Bonds (TIMHA, TIMHB, TODHA)

All debentures and bonds are secured and have a direct charge over cash and or assets of the issuer. Despite a deterioration of the Timbercorp financial profile, there will be sufficient cash flow to cover the debt obligations of Timbercorp and Timbercorp Orchard Trust. In all, we believe that the Timbercorp debentures and bonds should not be trading sub par (below $100) as we have not seen a deterioration of financial metrics sufficient to warrant a significant widening in Timbercorp credit margins. Furthermore, the fact that Timerbcorp has locked in annuity style income streams from historical projects and continues to develop and diversify its business model we believe that Timbercorp management will successfully work through the current issues.

 

Timbercorp Ordinary Shares (TIM)

Regulatory changes will have a significant impact on TIM’s non-forestry MIS operations. However, an underlying business remains, underpinned by annuity-style income streams.

In the short term, we expect negative sentiment to overhang the sector. TIM has flagged it will be urgently requesting the ATO to fast track an industry test case to resolve its views. Timing on this issue remains uncertain. In addition, TIM management will be asking the ATO to extend the product ruling for 12 months to allow projects which were planned for 2008 to be honoured.

Over time, we expect management will adapt the business model accordingly. However, earnings will initially be impacted.

In an announcement to the ASX, CEO Mr Robert Hance said “Timbercorp does not accept the new view of the ATO regarding carrying on a business. For more than 10 years, the ATO has been ruling that investors are carrying on a business. Given that there has been no change in legislation or any new cases to support it’s position, the decision is arbitrary and untested. The high Court has previously found that investors in
an MIS type project were indeed carrying on a business.”

If you require further information regarding this announcement please do not hesitate to contact your Thornton Group adviser.

Note:
Research provided courtesy of ABN Amro Morgans