BALDWINS • FoodLegal

Australian Lawyers and Consultants

Investing Outside the Big Smoke

May-June 2004

by Joe Lederman

A friend had recently taken to living in the countryside when I asked him what he intended to grow on his farm. “I intend to grow old,” was the short reply. He could have been the archetypal Collins Street farmer growing grapes, but he had a passive retirement in mind instead.

Moving out of the big city into the rural landscape or seaside village is part of an Australia “sea change” trend. Older people are also cashing in and downsizing to reasonably-priced real estate in prettier scenery with a view of the sun rising over the hills. This can be a reasonable retirement planning option and generate a cash surplus to supplement retirement savings.

For those who like the idea of shifting to a regional township and investing where they live, the investment conditions can be quite different from investing in the big city or suburbia. Building costs in county areas can be surprisingly high because materials and tradesmen are not always found locally and transportation costs are high. Rising oil prices may exacerbate this problem in future (Australia’s oil prices are set by world parity prices determined in Singapore and Australia is short of oil refining capacity). Real estate prices in some country regions particularly on prettier parts of the Australian coastline have jumped suddenly after many years in the doldrums. However, investors expecting high yields that were available when the cost of land was much lower may be disappointed by the market volatility, instability and seasonality in the tenancy mix, the threat of major retailers emasculating the smaller town traders, and the lack of a population reservoir to draw on from all that pretty blue water across the road.

The farm as an investment must be looked at as a business with substantial operational and maintenance costs to be budgeted for. The land may be cheap, but may require a lot of effort and money to generate an economic return. The prices of rural real estate can fluctuate on the strength or weakness of markets for the commodities produced in that area. In some regions, market deregulation has weakened the resolve of some farmers to remain on the land. However, the key to investment success for such land is to establish a new economic base and advantage for a new usage better than that of the former owner.

In theory, innovation of new products and land usage, value adding and additional marketing will be the keys to future success for the new property owner.

While deregulation of primary produce markets may have caused some farmers to leave the land, and thereby providing an entry opportunity for a new land owner, deregulation has also exacerbated other pressures on smaller landholders. In Australia, strong alliances have formed between the major primary produce suppliers and major food outlets. Some of these alliances create monopolistic logistics that will impact on the distribution of one’s products.

Other problems for primary producers include the heavy reliance on the weather and other seasonal factors to generate income. The income yields from farming real estate are generally lower and volatile compared with other commercial assets. Additionally, there can be other compensations such as lifestyle and possible future sub-divisional potential (but zoning restrictions and ‘green wedge’ planning schemes must be recognised for the limits they impose).

Another important investment issue is that of water rights and levies. There is legislation that governs water rights, and licences are required if water is to be used for irrigation or commercial purposes. Different types of water licences such as for dam construction or extraction or diversion can be required. Restrictions can also apply to water use to take account of the effect on a downstream user.

Taxation issues are important. On the good side, genuine primary production can attract tax concessions such as: the CGT concession for reinvestment as an “active asset”; and income “averaging” and use of farm management deposits to defer income. In addition, exemptions or concessions can sometimes apply in relation to rates, land tax and capital gains tax concessions.

On the bad side, some farming may be considered as “non-commercial” and allow the ATO to deny tax deductibility of expenses. (The non-conduct of primary production can also result in hefty State Land Tax assessments). However, if the farmer has a business plan and/or the operation is sufficiently large, the ATO is more likely to accept the genuineness of the primary production venture.

Rural properties have a place in a portfolio, but the legal and financial implications must be carefully considered. The key to any active investment is value adding and diversification, and in the case of properties outside the “big smoke”, there can be scope for both.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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