Lessons from Timbercorp Collapse
Financial advisers and accountants who recommended a Timbercorp product to their clients have much to answer for. Any good financial analyst would have flagged these products as a poor investment.
One of our forensic investigations included an analysis of the 2001 Olive Grove Prospectus on behalf of an investor who had been recommended to invest in this product by his adviser.
The scheme was sold to the investor on three points:
- There would be an immediate tax deduction.
- The average after-tax compound return would be 14.4% per annum.
- The investment would be funded to 90% and the investment returns would be sufficient to pay the debt.
Our analysis revealed that the information provided by the financial adviser was misleading and it is our opinion that the investment was doomed.
The adviser was paid a substantial commission and thought his advice was so good, he invested in the product himself.
The investor paid $1,000,000 to save $500,000 in tax. He borrowed $900,000 at 11% (at a time when interest rates were 7%). He then paid $99,000 per annum in interest. He was also required to make further contributions each year as the expenses of the olive grove outweighed the income.
In five years, he did not have one profitable year. The result was that his investment had no value, he still owed $900,000, and he was still obligated to make further contributions to fund the shortfall between income and expenses.
What we can learn from this:
- Beware of tax-driven schemes – they are usually unviable investments.
- If a return sounds too good to be true, then it probably is.
- Do your homework.
- If you don’t understand it, you shouldn’t be in it.