cso1,to further expand on your analysis of the agricultural MIS...

cso1,

to further expand on your analysis of the agricultural MIS sector in general and GTP in particular I think we need to include an evaluation of the circumstances of the recent prioce falls - in all the listed agricultural MIS companies - and which are not related to their financial fundamentals other than the effect those political changes might have on their future operations.

In this regard the change that has had the effect - proposed change - is the threat from the ATO - encouraged by the Federal Governmnet - that there be no further product rulings issued for non-forestry horticultural MIS schemes. Originally this was to see an end to these schemes at 30 June this year but the Commissioner ' very generously' issued an extension of one year last week.

It should be said that the tax commissioners move here is completely in concert with the Treasurers view of the world here. For entirely political reasons the Treasurer has stated (or more correctly his deputy Peter Dutton) that forestry will continue alone with a new supporting piece of legislation being introduced to artifically attempt to regulate the charging of fees by the industry. The main feature of this change is that a minimum of 70% of capital contributed by the punters investing in the forestry schemes should actually go into growing trees. LOL!! Gives you an idea how big some profit margins have been up until now!!

The funny thing is that the timber projects have argueably been one of the worst areas for the tax effective investors to sign up for of the whole range available but they are the ones being encouraged to continue. Never mind - we are interested in the prospects for the shareholders - not the punters in the projects.

As is always the case the market has reacted to the uncertainty created with regards the two largest companies being TIM and GTP by caving in their share prices.

This could change rapidly though and here is why.

The Federal Government has sought to act on the non forestry MIS schmes after community concerns about inflation of asset pricing (land and water in particular) drew attention of the government to the sector, which then scared Treasury when they realised how much money was pouring into it. It might defy belief but only 5 months ago senior people in Canberra apparently believed courtesy of their advisors that the sector had taken in roughly $600 million for the year when in actual fact the take was DOUBLE this.

First thing to note - Canberra is woefully short on factual information with regards the operation of these schemes (which I guess generally puts them on par with the individual growers in most cases).

Only forestry (originally supposed to be just bluegums but this blew out when the legislation was found to stipulate plantation timber thus allowing anything resembling a tree being grown for timber - pines, paulownia, don't they use walnut timber for furniture? ;-) ) gets the twelve month treatment for spending after the deduction. This is the specific and only piece of legislation supporting agricultural MIS.

All the non-forestry MIS operates using the normal tax rules. To claim the deduction an MIS promoter essentially needs to have the whole project up and running (and get a Product Rulling to satisfy his clients of the safety of the deduction) before he can offer it to the punters. It is this area that the Treaurer / Tax Comissioner twins have attempted to shut down.

The problem for them both is that they will almost certainly fail.

The commissioner has indicated he will run a test case against the schemes to prove his view that the schemes are not deductible and that the investors are 'passive' investors with the investments being capital in nature.

Trouble is this - for 9 years he and his predecessors have said (and more importantly ruled) otherwise.

It is more than likely that this test case - flogged all the way to the High Court - a process likely to take as long as 2 years - will find on purely technical case law that with no changes to the legislation or regulations that the Commissioner is NOT entitled to just wake up one morning and change his mind in relation to the interpretation of this legislation. There are supposedly at least 8 legal opinions and 4 QC's opinions also of this view.

Remember also that this will be the FOURTH time that the ATO has tried to get the courage up to attack this area. It just happens that this Commissioner has a proven track record of saying that his opinion is more important than the Courts - a view that recently attracted a dressing down from the Courts for his wasting their time. (As reported on the front page of the Aust Financial Review!)

Further, even were he t be successful, then what ?

That what is that more than likely the majority of the tax effective investment that had been flowing into the non-forestry MIS sector would deluge into forestry. Remember that almost no-one in these schemes has any idea really how they are performing during the life of the scheme - not because they don't want to know as the government would like you to believe (suppoosedlu because tax effective investors are city based parasites or something like that) but because the government has made such a dogs breakfast of the Act that the promoters are not really required to keep their punters (sorry - growers) informed about how the projects are going at the same time as all risk is transfered to the grower.

The long and the short of this is that if the government thought these moves would stop land and water asset pricing distortions they are WRONG. They are just pushing in the balloon in one area for it to pop out elsewhere - in the case of their being successful which is very unlikely with an investment frenzy in forestry causing an even greater stampede into high rainfall dairy country (or at least that of it which has not already been covered in trees or sold for future landbanks).

More likely is that the Tax Offices challenge to non-forestry agricultural schemes will fail - resulting in business as usual for the promoters whose share prices (TIM and GTP) have halved in concern of the risk.

This would leave the government with the only option available being that of trying to legislate MIS out of agriculture. I doubt they would do this as the result would almost certainly be huge collateral damage to other none MIS investors such as partnerships and comapnies.

There is one other option available to the government and which I have heard has recieved a lot of attention in Canberra from everyone other than the Treasurer which entails compulsory exchange listing of any product created in agriculture space if using the MIS act. From what I have seen it is a beautiful solution to the government AND the community AND the ATO's problems but at this stage appartently the Treasuer and Tax Commissioner are either on a crusade to kill the schemes altogether or in the case of the Treasurer can't be bothered considering logic - yet.

All this adds up to an solid on-going future for the Agricultural MIS sector and more than likely business as usual beyond the court challenges/s.

With little else changing in the structure of products being offered to punters by the companies one can reasonably predict strong on-going revenue and profits for the listed companies and especially GTP given its higher exposure to forestry than TIM.

At this stage I certainly see that the window has been created for the MIS co's to set themselves up to react strongly whichever way the Court challenge goes but in either case they look to me like a pretty solid short to medium term buy - especially when considering their past and current performance AND the price of the rest of the market.

The above is as always purely my personal opinion and is not advice. Do your own research.