Tax Minimisation

They were waiting for disclosure statements and other compliance requirements to be ready before they could officially tell anyone about it.

Steve ran the first "course" explaining how it all works was run in Sydney last night.

In a nutshell:

1. buy into primary production investment offering 100% tax refund, borrowing 100% of the funds required (suggestion is a 10 year loan, 3 years IO followed by 7 years P&I loan)
2. with the refund you get on your tax, margin to 50% and buy into an income fund (eg NavraInvest) to offset the costs of the investment borrowings
3. over the next 10 years pay down margin loan (or reinvest into fund) with any surplus income from the income fund
4. wait 10 years for investment to mature, by which time the original loan should be paid out, and you have a return from the investment + lots of units in the income fund
5. repeat the entire process for every year you still have a tax problem

... note that this is a very rough description of the process ... there are a lot of details, and you really need to get some good advice on whether this would work for you. You need to make sure you understand what the risks are, and whether you think you can handle those risks.

It's not tied directly to the NavraInvest funds, although there is a requirement to have enough income returned from your "income fund" to cover the costs ... and NavraInvest is a prime candidate there ... your choice though.

The main downsides, from my point of view, is the 10 year loan you need to take out to finance the original investment - it's not really flexible, it's fixed rate, and there are penalties for early payout ... so you're pretty much committed to that loan for the next 10 years. Of course, you don't need to take out that loan - but the whole mechanism kind of depends on you getting 100% finance from somewhere at a not-too-high interest rate.

The other thing I don't really like about it - is that these types of investments are quite illiquid. That's not really that much of a problem if there's none of your money tied up in it anyway (100% loan !), and indeed the units in the income fund are yours to do with as you please ... but still - a key part of it is that there's an illiquid investment tied to an inflexible loan.

I'm not saying I won't use this mechanism to reduce my tax liability ... I'm still analysing the details to see if I'm happy with the way the numbers work.

Fundamentally it looks sounds, although there are quite a few assumptions that come into play. The key is whether you are happy that these assumptions are reasonable and whether you think you can manage the downside effectively enough to get the net result you are seeking.

 

Best bet would be to attend one of his information courses ... can you get to Melbourne ? Steve will be holding a course there shortly.

Otherwise, I suggest you call Navra Financial Services and ask them for more info. It's not something that can adequately described online - there's a lot of detail.

Any you should definitely look at the PDS info as well.

 

Just as a follow up to my comments here ... I spoke with Steve this afternoon, and apparently there are several products available that fit NFS's criteria. The examples Steve gave were using a product from Great Southern Plantations - however, NFS will have other products available that work slightly differently, but still offer the same tax benefits (still waiting on PDS's for them, so no details available yet).

Steve indicated that the numbers may actually work better with some of these other products - which might help them look more attractive.

Either way, Steve is run off his feet since the course last night - apparently the phone hasn't stopped ringing with people interested in investing in these products.

 

That would be a question for Steve / NFS (Steve didn't mention the products by name - only that they were different forms of primary production with differing performance characteristics) ... I suggest you give NFS a call and ask for details. I suspect they aren't allowed to give out details "in public" until the relevant documentation is in place ... but they may tell you individually for your own interest. Not sure - you'd have to ask.

Steve did comment that the product return examples given at the presentation last night were kind of "worst case" ... there are products out there which are much better in the way they return income (eg some income through the life of the investment, not just at maturity). This may make it more palatable to some.

 

Not sure I understand your question Dave ?

Great Southern Plantations is an ASX200 listed company who grow hardwood products, primarily various types of Eucalyptus.

 

I suspect that because of the nature of the investment there is no "prediction" that is reasonable. The return you get at the end of the 10 years will be determined by the price they can sell the timber for at that time. If prices are high, you'll get a great return. If prices are low, your returns will be less.

The Great Southen Plantation investment is very simple - it's not some kind of "managed fund" or such ... it's true primary production. You buy trees (part of a plantation), they plant the trees, look after them, wait for them to grow, and then at the end of 10 years, they harvest them and sell them (either as raw wood, or more likely as woodchip) at the best price they can get at that time. It is possible that the prices might be maximised by pre-selling the woodchip.

You are investing in the trees themselves, and the returns you get depend almost exclusively on the price they can achieve for the wood they harvest at the end of the 10 years. Once they've taken out costs and fees and such, then you get your share of what is left as a return on your investment.

How much that is likely to be is difficult to tell. The price of woodchip and the costs involved in managing the trees to maturity could be quite different in 10 years time.

It is also possible that they don't have any similarly structured investments that have matured yet to compare it to ... so they literally can't show past returns as examples !?

However, as Steve points out - if everything goes to plan with his structure ... it really doesn't matter how the trees perform ... the only reason they are part of the equation is for the tax deduction. The goal is that the returns from the fund are more than enough to cover the costs of the investment over the 10 year period, so even if the return from the investment are zero, you will be no worse off because you now hold X units in the income funds at the end of that time.

Indeed, Steve's example provided at the presentation the other night was worked on the basis of no return from the investment. At the end of the 10 years, you had paid back the loan for the investment, and only had the margin loan left - with a 51% LVR on your income funds. Any returns from the primary production investment were only added at the very end to show what MIGHT happen. Even without that return (ie you get nothing back from your investment - not even capital), you are still quite a bit ahead for outlaying none of your own money !

Naturally there are no guarantees, and this outcome requires continued high performance from the income fund (Steve's example used 13% income return and 5% capital growth, each year).

There are other primary production investments that return income over the course of the investment ... these investments would work a bit differently, and would publish their suggested returns I'd think.