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NZRPT's tax problems far from solved

By Jenny Ruth

Wednesday 5th November 2003

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 Jenny Ruth
Directors and management of the New Zealand Rural Property Trust faced a gruelling grilling from a handful of disgruntled unitholders at the annual meeting in Napier on Friday.

Fueling investor ire are the low distribution, only 3 cents a unit in the latest year, the huge gap between prices available on two "grey" share markets and net asset backing and management's inability to deliver returns closer to net asset backing through land sales because of tax problems.

Chairman Sir Selwyn Cushing told the meeting the trust's net asset backing per unit rose from $1.91 to $2.23 (after the distribution) in the year ended June 30.

During the same year, the units traded on the New Zealand Stock Exchange's unlisted facility between 90 cents and $1.12. Since year end, prices have risen as high as $1.25, Cushing says.

Nevertheless, general manager of operations Brian Burrough reminded the meeting that investors' fortunes have improved considerably since 1999 when the trust was "closed," ending the practice of redeeming units at net asset backing for those investors wishing to sell.

Accelerating redemptions under this practice was destabilising the trust's asset base as it was forced to sell land to meet those redemptions. Cushing noted that about 88% of investors had voted to close the trust. But selling farms led directly to the current impasse with the Inland Revenue Department.

The IRD has deemed the trust to be in the business of buying and selling farms and therefore liable for capital gains tax on any sales going back to 1996 - it is prevented by statute from backdating capital gains tax further.

The trust has disputed this definition of its activities and believes it shouldn't be liable for capital gains tax and, so far, the trust hasn't paid this tax.

But Cushing didn't have any good news for investors on this front: the company is still a long way from resolving the tax situation, he says. In the meantime, with farm prices escalating, the trust's potential capital gains tax liability continues to escalate and selling land is out of the question.

Burrough noted that "grey" market price of units in 1999 was just 65 cents compared with as much as $1.25 now and that that performance is considerably better than the returns generated by the stock exchange's Top 40 index.

While the meagre distributions have fallen short of what was predicted in 1999, largely because of very low log prices, "the purpose of the trust was never to be an income producing vehicle for investors. It was a capital gain situation," Cushing said.

He and the trustee's representative, Dennis Church at Guardian Trust, rejected a number of heated accusations along the lines that the trust was being run for major unitholder (with 31.5%) and owner of the management company, listed company Williams & Kettle.

One unitholder was incensed about a 10 cents to 18 cents per unit difference between the prices available on the stock exchange's unofficial market and another facility provided by the Computershare registry services company. He dubbed this situation "dishonest" and called on the trustee to list the trust on the New Zealand Stock Exchange immediately.

Neither trustee nor manager has any control over either market.

Another major unitholder and leasee of the company's Waikoha station in the Waikato, Graeme Johnstone, made an impassioned plea that the trust commit to selling the station to the local bodies, who want to buy the property for a farm park.

Given the tax situation, it was a guarantee the directors couldn't give. "We hear and have been very cognisant of what you and the Waikato people want," Cushing said, adding that he has promised to keep Johnstone's solicitor advised of developments on the tax front.

Under the terms of the vote to close the trust in 1999, an independent review is due in November next year.

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