This article was written by Heath Lewis and Caitlin Sharp.
One of the significant challenges for Australian agriculture is well recognised – the need for capital.
The capital held and managed by Australian superannuation funds is immense - $2.8 trillion.
The answer for Australian agriculture seems obvious, but for some reason the marriage of superannuation funds and Australian agribusinesses remains unconsummated.
Following the illuminating discussion paper "Driving Super Fund Investment in Agriculture" released by Industry Super Australia in 2017, in May 2018 the Federal Government asked the House Standing Committee on Agriculture and Water Resources to inquire as to the Australian superannuation industry's apparent lack of interest in meaningfully committing to Australian agriculture.
The Committee's terms of reference were to inquire into whether:
- regulatory requirements act as a barrier to superannuation fund investment in Australian agriculture;
- the availability of information (including performance statistics) might be inhibiting investment in the sector; and
- other practical barriers to superannuation fund investment in Australian agriculture exist.
Barriers to investment
The Committee's report, which was tabled on 11 December 2018, notes that the cause of low superannuation investment in Australian agriculture is multi-faceted. While there are no distinct financial regulatory barriers preventing superannuation fund investment in Australian agricultural, the Committee's report identifies a number of contributing factors. In addition to sector specific concerns about the volatility of commodities market, environmental and climactic risks, the report identifies the following barriers to investment:
- Foreign investment rules and tax: while the inquiry was focused on Australian - based superannuation funds, the Committee noted that the complex regulatory regime that applies to foreign investment in agriculture has flow on effects to domestic investment. Investment funds often pool Australian and overseas investors which can result in the foreign investment rules and managed investment trust tax rates applicable to foreign investors applying to Australian investors as well. The submissions to the Committee also noted that the complex regime applicable to foreign investors in Australian agriculture can also deter domestic institutional investors who are concerned the regime will limit the pool of buyers when they wish to exit. The Committee also received submissions noting that the large upfront costs of State land taxes and stamp duty are a significant value offset impacting returns in the first year which creates an ongoing drag on returns.
- Fund manager lack of understanding of the agricultural sector: the Committee identified a lack of understanding in the superannuation industry of the investment potential of agriculture as arguably the number one barrier to investment. The report suggests that there needs to be a coordinated and concerted education effort from both government and the agriculture sector to promote and inform potential investors about the reality of investing in agriculture.
- An absence of sector performance data. The report highlighted the inadequacy of currently available government data relevant to the agricultural sector, its financial performance and investment suitability. The Committee agrees that the implementation of the priorities identified by the ABS and ABARES in the Roadmap to Improve the Agricultural Statistics System has the potential to improve agricultural data for superannuation fund investment.
The Committee has made four recommendations:
- that the Government prioritise implementing the Roadmap to Improve the Agricultural Statistics System to build data sets that are accessible and relevant to potential investors in the agriculture sector.
- that the Government investigate the following to reduce the impact of foreign investment and taxation rules on agricultural investment:
- that the Government engage with COAG and peak agricultural bodies to develop an information and promotional platform on the benefits of investing in Australian agriculture.
- that an initial superannuation and agricultural industry investment working group be convened, facilitated by the Government in the first instance, to identify and promote improved business processes, structures and a corporate approach, that would facilitate increased investment.
- reviewing the rules regarding foreign investment advertising requirements and managed investment trust tax rates, and consider any unintended consequences when applied to investment in agriculture by companies investing on behalf of foreign interests or in tandem with domestic investors; and
- engaging with State and Territory governments regarding the impact of stamp duty and land tax on agricultural investment, while investigating options for taxation offset relief at the Commonwealth level in appropriate circumstances.
The submissions to, and report of, the inquiry are not earth-shattering in that the issues have generally been previously recognised in the Government's Agriculture White Paper and the IA discussion paper.
However, the fact that an inquiry was established is a positive sign that the issue remains on the political agenda. The question now is, what priority will be given by the government and politicians to the paucity of investment in Australian agriculture by Australian super funds?
The 2019 Federal election provides an opportunity for the development of policy initiatives around the issue, building on the outcomes of the inquiry.
And the industry might ask the question, has the time arrived for a Government inquiry to quantify the economic benefits to Australia of supporting and expanding the Australian agriculture industry, and to seriously consider whether financial or tax incentives for super fund investment in the sector are therefore justified? Or put another way, if it is not going to happen naturally (for whatever reason), should the marriage of Australian superannuation funds with Australian agriculture be "arranged"?
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