Chapter 4 - Taxation
I was one of the group of people that believed that if an
investment had a PDS then that was a stamp of approval by ASIC. As it had a tax
ruling, I believed that was a stamp of approval by the ATO.
Since their beginnings, MIS have attracted taxation benefits. For tax
purposes, investors in an agribusiness MIS are recognised as 'carrying on a
business' whereby they are able to claim tax deductions for costs associated
with the normal operations of their business. Researchers Tracy Bramwell and
Peter Chudleigh described
tax-driven agricultural and horticultural development schemes as:
...those that rely on raising large amounts of financial
resources with significant tax effectiveness from many investors and where
these resources are used for development of agricultural/ horticultural
In this chapter, the committee is not concerned with the merits, or
otherwise, of the tax concessions allowed to investors in agribusiness MIS. The
committee is primarily interested in how these schemes were promoted as tax
effective schemes; the extent to which the tax incentive was an effective and
appropriate enticement to invest; and investors understanding of what the tax
benefit meant for their investment.
Tax benefits as driver of investment
Much has been written about the tax incentives offered to investors in
agribusiness schemes, including commentary generated during the committee's
inquiry into mass marketed tax effective schemes in 2001–2002.
Unlike previous inquiries, the committee's current inquiry attracted
many submissions from investors who explained the role of the tax incentives in
their decision to invest. Their evidence shows that the broad assertion about
the tax benefits determining the decision to invest was too simplistic. Of the
investors who made submissions to the inquiry, many indicated that the tax
benefit was only part of their reason for investing in an agribusiness MIS and
definitely not the driving force.
Indeed, some provided information on their annual income, which could only be
described as modest.
Clearly, a number of the investors were not high wealth individuals. For
example, one couple noted:
Per our tax returns, we had jointly earned $82,000 in 2005
and $95,000 in 2006. Steve's [the adviser] recommendation was that we invest $126,000
in the 2007 scheme between us, all funded via Great Southern Finance.
Another stated simply that there was no benefit for her to invest in
Timbercorp because she was not in a high tax bracket.
A third example came from a man on $75,000 a year with immediate plans for his
wife to stop working to look after family.
In general, the growers were not astute investors knowledgeable about
minimising their tax. Rather, for many of the investors who wrote to the committee,
the assumption that the investment would provide a secure and stable return was
They wanted to 'find a low-risk way to make long-term investments' that would
secure their future.
For example, one grower stated:
At the time in 2008 I was a single mother working over 40
hours a week, studying at night school whilst raising teenage children. I was
paying more than required into my mortgage and thought that if I was able to
take this money and invest it for long term gain my life would not always be so
hard. This was a massive step for me; I am a hard worker and did not have money
to spare but was advised by the Financial Advisor this Timbercorp investment in
2008 would be of great benefit for me to become part of the forest industry
One couple informed the committee that they were advised that investing
in the scheme was 'a good option' for them, as they were 'investing in the
agricultural business and it was a long term investment that would provide
The promise of future returns attracted some parents who hoped to use the
income to fund a good education for their young children.
For example, one such grower stated categorically that his investment was not
'a tax dodge'. He was looking to provide his daughters with a start in
life—education, car and marriage.
Mr Peter Jack informed the committee that his goal was also to use the scheme
to provide for his family and was looking to secure a funding source to help
meet the cost of educating his four children.
The same motive encouraged yet another couple to invest in MIS. They were led
to believe that the project was long term, safe in nature, approved by the ATO,
and a great investment for the future. They informed the committee:
Our reasoning for investing in the project was to provide for
our young family and have a better financial future.
Another grower explained that, while there were some tax advantages to
MIS investing, the reason he invested in Timbercorp was to try to secure a
bright future for his family but 'all that is left is dark clouds'.
Others envisaged the investment as a long term venture and a means of boosting
For example, Ms Barbara Gray stated:
We would not consider ourselves naïve investors however
require a good return on any funds invested for not only future retirement but
a healthy age related annuity profile when that became available.
Timbercorp, FEA Plantations and two Macquarie Bank managed
funds were presumably investigated and then recommended to us as legitimate tax
alternatives. And we went ahead with those investments on our Accountants
Peter and Elaine Wilson, who planned to be self-funded retirees,
rejected the notion put forward by the courts that they only invested as a tax
evasion. They informed the committee that they invested to have an income
stream in their retirement.
Similarly, Mr Brett Lawtie informed the committee that his adviser told him
that he needed to invest in some agribusiness to aid in retirement planning and
signed up for $35,000 worth of almonds and olives. Mr Lawtie contended that his
intention was 'purely for retirement planning NOT tax avoidance'.
Another couple, a bus driver and his wife, a part time retail assistant,
were not, according to their own assessment, 'the investing type'. They
indicated that they did not need to reduce their tax, and 'certainly did not go
into this with the view that this was a tax minimisation scheme'.
Likewise, another couple told the committee that they invested in Timbercorp
after their financial planner explained and recommended not only the tax
deductions but also the promise of a 23 year-long income. They explained:
At the time [the Husband] had been retrenched after 14 years
and as we were entering our 50s with young children we were encouraged to
prepare long term for our golden years. The project was partly financed by us
(10% initial deposit) and internally financed by Timbercorp Finance
Some submitters were also persuaded to invest on the understanding that
the schemes would be helping people in rural districts—farmers, farm hands and
One such investor stated:
Based on the financial advice and reasons why it would be a
good investments in that we were supporting Australian farmers and hence contributing
to the Australian economy.
A similar incentive prompted another grower to invest in an agribusiness
MIS—not only to accumulate funds for retirement and to generate passive cash
flows for future financial security but to help contribute to the growth of
Mr Peter Crean informed the committee that he was advised to invest in
ITC pulpwood and sandalwood projects as he would be turning 65 at the
time. He explained that he and his wife:
...felt good about the investment as the return promised to be
good and also we were investing in Primary production which we thought was good
Similarly, Mr Trevor Burdon, a grower investor and environmentalist, 'invested
to provide the forestry industry with alternative resource to heritage forest
stocks in the Snowy Mountains and Tasmania, to promote local industry
(especially in Tasmania), and to generate a return to support my independent
Certainly not all growers were simply looking for a way to minimise
their tax: their modest incomes confirming that such an intention was not a
significant consideration. In many cases, the clear and consistent evidence attests
to the fact that the tax aspect was not the primary incentive.
While the tax advantage may not have been the highest priority for some
investors, it was a factor and certainly a major plank in the marketing
strategy for these products. But even investors primarily motivated by the tax
advantages were entitled to sound advice appropriately tailored to their
particular circumstances. For such growers, their claims for tax benefits were
generally legal. As the Australian National Audit Office (ANAO) noted in 2004:
Taxpayers have the right to arrange their financial affairs
to minimise tax, but it is not acceptable to do so by avoiding the intent of
the law or by not following the law itself.
As noted earlier, agribusiness MIS usually take some time before they
earn any income (5 to 20 years). If the investor receives all the tax
deductions up front, any income earned later is taxable. It should also be
noted that the ATO may query the tax deductibility of the loan interest if the
investor 'appears not to be taking any real "business risk"'.
There were no suggestions that growers were avoiding their tax obligations but,
as noted above, even investors seeking the tax advantage should not have been
encouraged to invest in high risk, highly geared products if they were retail
investors. They certainly should not have been led to assume that ATO rulings
were an endorsement of the scheme.
Significance of ATO rulings
Australia's self-assessment taxation system relies on taxpayers having a
reasonable understanding of taxation law so they are able to fulfil their tax
obligations. Thus, an important element of the ATO's administration of the
taxation law is the provision of interpretative advice on taxation issues. Under
this self-assessment regime, the Commissioner of Taxation may issue both public
and private rulings that are legally binding on the Commissioner.
In June 1998, in an attempt to preserve the integrity of the tax system,
the ATO introduced product rulings. These rulings allowed promoters of MIS to
provide relevant information to the ATO, which could then rule on the deductibility
of scheme payments for participants in the scheme. Such rulings gave investors
certainty about the deductibility status of their claim but only on condition
that the scheme was implemented according to the information on which the ATO
Early problems around tax rulings
During the early 2000s, a significant number of investors in
agribusiness MIS were caught out by having the ATO deem their tax deduction
ineligible. At that time, the ATO announced it would initiate aggressive tax
measures, which would include issuing amended assessments to approximately
40,000 taxpayers who had invested in MIS.
The assessments effectively disallowed some deductions and required investors
to repay the deducted amount plus penalties and interest. Because the
deductions covered a number of years, some investors faced paying substantial
amounts of money.
In response to the criticism of the ATO's action in requiring investors
to repay their deductions and hefty penalties, this committee inquired into the
mass marketing of tax effective schemes. In June 2001, the committee tabled an
interim report that considered the economic, social and personal effect of the
then ATO recovery action on taxpayers involved in these tax effective schemes.
At that stage of the inquiry, the committee was primarily concerned with whether
the level of the tax burden imposed on scheme participants, caught up in what
was held to be tax avoidance arrangements, was justified.
Notably, the harm caused to investors was not the collapse of the schemes but
the improper marketing of schemes that promoted tax benefits and the ATO's
decision to deny such claims.
Of relevance to this current inquiry, however, is the potential for ATO's
rulings to be misrepresented or misused. For example, with regard to an ATO private
binding ruling (PBR), the committee observed in 2001 that:
Although only a small number of PBRs were issued, it appears
that promoters and designers exploited them to market schemes en masse.
Common practice included using a PBR to market later versions of a scheme or
schemes with comparable features. While promoters misused PBRs in this fashion,
it seems that many scheme participants relied upon them as a seal of ATO
approval or saw them as representing the ATO line on schemes in general.
The committee's finding in 2001 that financial advisers did not appear
to have advised their clients fully of the risks involved in investing in these
schemes, particularly the risk of the ATO taking a different view of the
arrangements is also of relevance to this current inquiry.
In its 2001 report, the committee highlighted the problem of investors
misconstruing the ATO's rulings on mass marketed tax effective schemes and
interpreting them as an endorsement of the product. At that time, ASIC conceded
that the schemes were generally sold on their tax advantages and that on
occasion, they were mis-sold on those benefits. Clearly, in 2001 there were
warning signs about the possible misuse of ATO rulings when it came to
promoting and marketing agribusiness MIS.
Five years on, a study found that the ATO's product rulings system had substantially
resolved taxation uncertainty for MIS participants. According to the study,
product rulings were in effect a move away from 'pure' self-assessment and a useful
development. It warned, however, that, while providing clarity on the
eligibility of tax deductions for investors in MIS, the ATO product rulings
were not intended to indicate, and certainly not endorse, the commercial
viability of the respective product.
In its 2008 submission to the non-forestry MIS review, the National
Farmers' Federation (NFF) raised concerns about the potential for the ATO
product ruling processes to exert undue influence over investor decisions.
Warnings—not sanctioning the commercial
viability of product
As explained earlier, the Commissioner of Taxation may issue public
rulings that are legally binding on the Commissioner.
An ATO public ruling is an expression of the Commissioner's opinion about the
way in which a relevant provision applied, or would apply, 'to entities
generally or to a class of entities in relation to a particular scheme or a
class of schemes'.
The ATO may allow an investor to claim the operating expenses of an
agribusiness MIS as a tax deduction against the investor's total income, which are
allowed through a system of product rulings that describe the specific cost
items deemed legitimate deductable expenses. Product rulings are binding public
rulings about a product such as an investment arrangement or a tax effective
The committee understands that while a product ruling from the ATO provides
entities covered by that ruling with certainty as to the tax consequences of
participating in that particular MIS, the product ruling provides no
the scheme is commercially viable;
the fees, charges and other costs are reasonable or they
represent industry norms; or
the projected returns will be achieved or are reasonably based.
In its product rulings, the ATO advises potential participating entities
to 'form their own view about the commercial and financial viability of the
It advises further that this assessment should involve considering important
issues such as the 'track record' of the management; the level of fees in
comparison to similar products; how the product fits an existing portfolio; and
whether projected returns are realistic.
ASIC also drew attention to the fact that the ATO makes 'an express
representation in every product ruling it issues that it does not sanction nor
guarantee any product as an investment'.
While the ATO makes clear in its product rulings that it does not
sanction or provide assurances as to the commercial viability of the product
subject to the ruling, evidence indicates that some investors missed this
message. In this regard, ASIC acknowledged that investors may fail to have
regard to warnings issued about these products.
There can be no question that a number of product producers and financial
advisers used the ATO ruling as a marketing ploy that succeeded in convincing
some investors that the ATO had in fact 'approved' the scheme. For example, Mr David Cornish,
a private consultant who focuses on agricultural investment, informed the
committee of his concern that investors did not fully appreciate the standing
of product rulings. He also accepted that when issuing a ruling on a scheme,
the ATO did not, in any way, make a judgment on the financial viability or reasonableness
of that scheme. In his opinion, however, it would seem that the general public derived
a level of comfort from an ATO product ruling that a scheme would be viable.
Mr John Lawrence, an economist, tax accountant and more recently a
public policy researcher, similarly noted how people were fundamentally mistaken
in believing that having purchased a scheme with a product ruling they were
'safe'. He explained:
The tax office did nothing to dissuade them from the error of
this view. The tax office did nothing—to my knowledge, anyway—about checking
whether or not the schemes were run in accordance with the product ruling once
they were established.
Consistent with these observations, many investors who wrote to the
committee understood, or were led to understand, that the ATO's ruling provided
assurances about the commercial soundness of the scheme. As one investor
stated: 'it was implied that due to the tax arrangements associated with the
scheme they were government endorsed!'
The matter-of-fact way investors spoke of their scheme revealed the
genuinely held assumption that the government had given its support. For
example, one investor contended that surely by 'investing for the future
through government endorsed schemes, our retirement would be dependably
Similarly, another couple who invested as individuals and not through their
...who in their right mind would think that these companies
fully approved by the Australian Government for tax saving investment and
properly screened by ratings companies and our accountant would go into
liquidation that very year. Not only take the investment and not even bother to
plant the so called harvest.
Likewise, Mr David Lorimer was convinced about the legitimacy and
soundness of his investment. His accountant introduced him to the schemes,
which were presented 'as long term financially secure investments'. Furthermore,
Mr Lorimer was led to suppose that, due to the tax arrangements associated with
the schemes, they were government endorsed.
Another investor, Mr Michael McLeod, told the committee:
I was provided with many glossy brochures, and the forecast
returns looked healthy plus the scheme was endorsed by the ATO with the tax
credits which made my decision to sign up seem like a good idea. I was happy
that I was doing something positive with my money and taking charge of my
future to look after my family so as I didn't have to rely on Government
handouts during my retirement years.
Mr David Huggins, a legal practitioner representing a grower, maintained
that the tax arrangement lured people into making 'what was in reality, a
highly speculative investment'.
Mr Samuel Paton, principal of an agricultural consulting evaluation firm, similarly
explained that unfortunately:
...the hapless lay investor who was putty in the hands of the
unscrupulous financial planners, receiving 10% commissions from the promoters
assumed the ATO Ruling was a 'tick' for scheme viability.
Thus, although the tax incentive may not have been the primary objective
for some investors, many of them were reassured by the fact that, in their
view, the ATO had endorsed the MIS and hence had confidence to invest in the
Investors often drew additional comfort about the security of the schemes from
an understanding that ASIC had also approved them.
Registration of MIS and required
ASIC must register an MIS within 14 days of lodgement of the application
for registration, unless it appears to ASIC that the application or the
proposed scheme is deficient with respect to a number of requirements. These
requirements go mainly to governance or administrative matters such as the
scheme's constitution and compliance plan having to meet statutory obligations.
Some investors formed the view that a scheme's registration meant that ASIC had
in some way vetted the scheme and given its backing. They also interpreted the
publication of prospectuses and product disclosure statements as an indication
that ASIC had vouched for the schemes. But, according to CAMAC:
Whatever view of the law is taken on these matters, ASIC is
not required to assess the commercial merits of a scheme.
Many investors assumed otherwise.
In 2001, ASIC informed the committee that it had gone to great lengths
to explain that it does not approve prospectuses: that it does not register these
documents. It explained:
There is an argument that says that the lodging of a
prospectus with the regulator seems to create the impression in the minds of
some investors that the regulator has had a role to play in somehow giving it a
tick or otherwise ...The disclaimer that is put in the prospectus, which at the
moment says 'ASIC takes no responsibility for the contents of this prospectus',
might in fact in some perverse way create the impression: 'That means they must
have looked at it, if they are excluding their liability'...But the whole path
down which the law is going is that it is a disclosure based regime and that
the investor is supposed to make their own due inquiries, et cetera. It is not
a regime that we designed, of course, but it is something that we would
Recently, ASIC informed the committee that, through media releases,
consumer warnings, its consumer website, speeches and media commentary, it regularly
and consistently warns consumers that it does not 'approve' investments, including
agricultural MIS schemes. For example, currently on its MoneySmart website ASIC
has issued the following warning:
Be aware that a licence from ASIC does not mean that ASIC
endorses the company, financial product or advice or that you cannot incur a
loss from dealing with them. ASIC does not approve business models. ASIC grants
a licence if a business shows it can meet basic standards such as training,
compliance, insurance and dispute resolution. The business is responsible for
maintaining these standards. Checking ASIC's databases should be only one of
the many checks you should do before you invest your money.
Even so, ASIC noted its concern that some retail investors might wrongly
conclude from the existence of a PDS or prospectus and the operator holding an AFS
licence that the government regulator had undertaken some checking and 'the
disclosure was sufficient and the schemes being operated were commercially
Despite ASIC's attempts to correct the false impression that a
registered MIS has the regulator's imprimatur, some investors remained
convinced that ASIC had endorsed their scheme. For example, one grower
explained that the 'key selling point' was ASIC and the ATO's approval as a
genuine, 'sanctioned' investment.
Another stated that she was one of a group people who believed that if an
investment had a PDS then 'that was a stamp of approval by ASIC' as was the tax
Another investor assumed that the scheme in which he invested was ASIC
'sanctioned'. He observed:
ASIC have been more than useless; they have endorsed corrupt,
unethical and unconscionable conduct. Great Southern was a fully endorsed product.
Whichever government agency that...endorses financial products on offer in the
marketplace did not do their job well enough to identify that Great Southern
was essentially a ponzi scheme.
A couple, who also likened the MIS to ponzi schemes, wondered how the
projects ever got ATO approval in the first place.
In their view, not even ASIC or the ATO put enough research into these
investments before approving them.
One couple indicated simply that they thought they were investing in 'a nice,
safe investment, a product that was endorsed and supported by Australian Government
legislation, and that nothing could go wrong'.
As another example, one investor asked:
How is it possible for ASIC and the ATO to assess and give
approval for such a financial scheme (were they deceived as well?), only to
find that within 18 months it turned out to be [a] Ponzi scheme where hundreds
(thousands?) of investors lost hundreds of millions of dollars, some of whom
will go bankrupt and for a bank to cash in on this misrepresentation?
Speaking for his wife, one submitter informed the committee that she had
assumed Timbercorp was legitimate—'fully supported and endorsed investments by
the government, ATO and ASIC...and therefore relatively safe'. Otherwise, he
explained, his wife would never have considered buying into these investments.
He contended that steps should be taken to ensure that a false impression is
not created, advocating that greater prominence be given to the fact that ASIC
or the ATO take no responsibility for the contents of the PDS and do not
endorse or support its content.
The concerns raised in 2001 about the possible mis-selling of
agribusiness MIS were well founded. In the following years, many growers mistakenly
formed the view that the ATO had vouched for the viability of the schemes.
The ATO's effort to ensure that investors understood that it did not
vouch for the commercial viability of agribusiness MIS, was undermined by a
totally different perception that took hold in the minds of a number of retail
investors. It would appear that some product issuers and financial advisers allowed,
or even encouraged, investors to assume that an ATO product ruling meant
government endorsement of the commercial viability of the product. A similar
misunderstanding gained currency about ASIC giving its support to the schemes. Thus,
growers mistakenly assumed that the products had ATO and ASIC approval and
hence were deemed to be safe and suitable for retail investors.
The committee recommends that the ATO undertake a comprehensive
review of its product rulings to obtain a better understanding of the reasons
some investors assume that an ATO product ruling is an endorsement of the
commercial viability of the product. The results of this review would then be used
to improve the way in which the ATO informs investors of the status of a
The committee recommends that the ATO and ASIC strengthen their efforts
to ensure that retail investors are not left with the impression that they
sanction schemes, including the use of disclaimers prominently displayed in disclosure
documents including PDS.
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