Environmental and farming community concerns
The committee's main focus has been on the collapse of some of the large
agribusiness MIS and their effect on retail investors. In this chapter, the
committee turns its attention to farmers and landowners who had leased their
land to an agribusiness scheme and to the environment and communities affected
by the activity of agribusiness MIS including when a scheme failed. It
considers the consequences for the agribusiness sector, particularly the
forestry industry, and the future prospects for, and possible role of,
agribusiness MIS in Australia.
Mr Hirst informed the committee that farmers, as landowners, certainly
jumped at the opportunity to be involved in the MIS industry. Ms Davis noted
that the farmers regarded leasing their property to an MIS as a business
proposition on the basis of a standard business lease. She explained that from
the farmers' perspective they were providing a service 'as simple as mowing the
We have leased you our land, you grow your trees. Get on with
it. It pays the rent and it is a straight business transaction.
Experiences have shown, however, that the agreements with landowners were
not straightforward and the consequences stemming from a failed scheme have
been far reaching.
Environmental and social consequences
Mr Sean Cadman from the Cadman and Norwood Environmental Consultancy
informed the committee that:
In 1990 the National Plantations Advisory Committee was
established to investigate the opportunities for integrating forestry and
farming commercial wood production on cleared agricultural land.
The advisory committee was to examine sustainable opportunities for
expanding Australia's plantation estate. Mr Cadman, who represented the Australian
Conservation Foundation on that committee, highlighted the importance of understanding
...as early as 1990 there was recognition in the terms and references
of the committee and in the reports that were undertaken to inform the
recommendations of the committee, that a poorly managed rollout of a plantation
development agenda could lead to very perverse outcomes for the environment and
the long term sustainability of an Australian plantation estate.
According to Mr Cadman, specific concerns were raised, or advice given,
at that time including, but not limited to:
plantation establishment should NOT drive land clearing;
the taxation treatment of the time was a disincentive to investment
because the tax all fell due at the point of harvest;
any taxation changes to incentivise plantation should not become
an end in themselves and plantation establishment needed to be based on
business models that did not require the continuation of tax deductibility for
the business model to succeed;
specifically that taxation incentives needed to be phased down to
zero over a 10 year period;
to be sustainable plantations needed to be established to provide
inputs to industrial processing plants and that just growing for wood chips for
exports was unlikely to be sustainable;
site selection should be based on realistic growth rates,
specifically that the costs of pest control should not be underestimated and
that rainfall and soil parameters need to be within a certain range or economic
growth rates would not be realised (CSIRO modelled the sites in Australia that
would be most likely to succeed); and
communities needed to benefit clearly from any large plantation
establishment program because of negative community experiences in the past.
Researchers similarly warned of the potential that, eventually, the
benefits of investor tax concessions could 'show up as subsidies to higher cost
structure operations and/or returns to operators of such schemes, rather than
inducing expansion of efficient investment'. They cited numerous complaints
about the harmful effect of agribusiness MIS schemes on traditional farming
activities, including 'giving an artificial tax-induced boost to agricultural
Evidence before the committee clearly shows that the concerns identified
in the 1990s were justifiable and ultimately, in many cases, the failure to
heed them contributed to the downfall of some very prominent MIS with wide
ranging environmental consequences.
Damage to environment and
reputation of agribusiness MIS
Mr Cadman referred to the collapse of the schemes and the high
probability that most of the lots would be 'cleared and revert to either
agricultural production or become derelict weed-scapes'. He also noted the concomitant
destruction of faith in the forestry sector, observing:
Hundreds of thousands of hectares of land was cleared in
Tasmania and on the Tiwi Islands at a huge environmental cost. The Australian
Public has almost nothing to show for the millions of dollars of tax incentives
given and gullible investors pursued by unscrupulous financial advisors have
Likewise, the TFGA lamented the aftermath of the failure of some
schemes, noting that many plantations have died or stopped growing while others
have received little or no ongoing maintenance. It stated:
In the specific case of the forestry schemes, there have been
a raft of perverse and detrimental outcomes which have been magnified by the
collapse of Gunns Ltd. Many private landowners who had arrangements with Gunns
have now been left with a devastating economic and emotional legacy. Coupled
with the impacts of significant sovereign risk as a result of government
decisions, this leaves scars that will ensure that further plantation expansion
and replanting on private land will be limited if non-existent. Many have been
so adversely affected that the thought of planting another tree on their
property is too much to bear.
In the association's assessment:
Much of the original speculation with the MIS plantation
arrangements within Tasmania was that the estate would become a resource for
downstream processing. The main component of this was promoted to be the
proposed Tamar Valley pulp mill, with other minor processing options adding to
the overall industry. In hindsight, the reliance on one project, and the
establishment of vast plantations to feed it, was clearly strategically poor.
Silver bullet solutions rarely work. The schemes should have been accompanied
by concise research on what other options were available for downstream
processing. Had that been the case, then in the process a natural
diversification of options would have been developed. This would have ensured
that the failure of one project and or company would not have put at risk a
Noting one of the key underpinnings of the forestry MIS—to enhance
investment with the objective of increasing the area of commercial trees to
levels that were not being met by normal market forces—the TFGA explained:
The idea was that allowing tax deductions would enhance this
objective; and at the same time provide a valuable timber source into the
future. While it is debatable that such a market failure was real, the fact
remains that we now find ourselves in a situation where the bulk of the
plantation estate in Tasmania is an asset that is rapidly collapsing.
Mr Lawrence, an economist, tax accountant and more recently a public
policy researcher, was critical of the ATO for failing to monitor the schemes
once they were established to ensure they were being run in accordance with the
product ruling. He recalled visiting plantations where 'trees had died, cattle
were in there, horses were in there'.
Mr Jim Crowley, whose property is surrounded by plantation developed
land through an MIS, also drew attention to:
no demonstrated responsibility for the on-going maintenance of
shared boundary fences;
no maintenance of fire-breaks;
no weed or wallaby control;
an increased fear of fire [the plantation land was previously cleared
massive irritation that my 'neighbour' does not pay council
Similarly, Mr Paton listed the by-products of forestry MIS and related
schemes, which included:
vast tracts of land in Western Australia, Victoria and South Australia
now converted back to pasture because of failed plantations;
huge kangaroo plagues in the Albany, Great Southern region of
Western Australia and the Green Triangle region in Victoria/South Australia;
local community dislocation in townships such as Hamilton, where
huge flurries of investment activity initially occurred, distorting land
values, artificially ratcheting farm rentals and taking high value farmland out
of production into passive monocultures such as Blue Gums.
The committee visited a
plantation outside Launceston. In this instance, the failure of the FMIS led to
the foreclosure and sale of the property. The visit also provided an example of
where tree growth rates did not meet the expectations outlined in the prospectus.
In Mr Paton's view, agribusiness MIS should be 'shut down once and for
all in every aspect'.
In contrast, however, some submitters envisaged a promising future for such
schemes. Even so, they recognised that changes were required.
Clearly, forestry MIS failed to achieve the overriding strategic goals
of 2020 Vision—to have a plantation industry with a sound
reputation as a credible investment destination and to have 'well-informed investors
willingly participating in well-run and profitable managed investment
The collapse of a number of significant agribusiness MIS companies has severely
undermined investor confidence in such schemes. According to NewForests:
With major MIS companies being liquidated and most MIS investors
losing much of their investment, it is unlikely that the sector will ever
recover. The opportunity for institutional investors is to rationalize the land
and forestry assets—1 million hectares of timber plantation—into a consolidated
As noted in chapter 2, since the introduction of MIS in 1998,
agribusiness schemes have raised approximately $8 billion. To appreciate the
magnitude of the financial loss that stemmed from failed agribusiness MIS, the
particular schemes that have collapsed raised:
Timbercorp, just over $1 billion;
Great Southern, $1.8 billion;
FEA Plantations, $426 million;
Rewards Projects Limited, $291 million;
Willmott Forests, about $400 million; and
Gunns Plantations, about $1.8 billion.
A number of major participants in agribusiness, but particularly in the
forestry sector, argued, however, that the aims and objectives spelt out in 2020
Vision remain valid. They recognised the significant contribution that the
Australian forestry industry currently makes to Australia's overall economic
Viability of schemes after liquidation and sale
Mr Ian Farquhar, Tasmanian farmer, informed the committee that in his
opinion the underlying motives for the schemes remain valid, which were to
address two needs:
to return more trees to the Australian landscape—although, in his
view, MIS may not be the most appropriate vehicle to meet this need of rural
landscape management; and
to remedy the significant deficiency in the long term base capital
in Australian primary industry.
According to Mr Farquhar:
The MIS successfully identified an availability of funds in
our cities for investment in primary industry. It is unfortunate the MIS
structure attracted many who primarily sought to avoid taxation rather than invest
in rural business.
Mr Farquhar noted that 'a few well managed businesses have demonstrated
that this vehicle can be used to develop successful, productive enterprises'.
Likewise, Mr Bryant suggested that MIS:
As a form of investment...are important to the growth of this
country. It goes to the heart of what regulation there is around entities being
able to do business in this country. That is what has gone wrong here. The
regulation around how Timbercorp could operate and grow to the size it did was clearly
Since the collapse of Australia's major agribusiness MIS in 2009 and
2010, Timberland Investment Management Organisations (TIMOs) have purchased a
significant area of the MIS plantation estate. The Department of Agriculture
informed the committee that, while the trend in MIS investments was based mostly
on individual investors, after 2009:
...the majority of the MIS companies which have gone into
receivership and liquidation have had their assets purchased by a small number
of TIMOs backed by institutional investors. The institutional investors were
generally offshore superannuation funds, pension funds, university endowments,
foundations, hedge funds, as well as high net worth individuals and families.
The liquidators of the Timbercorp Group, KordaMentha, informed the
committee that while the schemes did not continue, the 'sale assets to
well-resourced operators was ultimately to the benefit of the industries and
communities of which they were a part'.
It noted that similar to the restructure of the olive asset, there has been:
...the sale of the assets relating to the forestry, almond,
citrus and table grape MIS to operators with the financial capacity to properly
maintain and harvest the crops, and provide employment opportunities in rural
communities, into the future.
Likewise, the ANZ informed the committee that the underlying
agricultural plantations sold by the Timbercorp liquidator were operating
successfully 'after market conditions improved and the drought broke'.
Reforming the system
The Australian Forest Products Association also acknowledged the
damaging and disruptive effects of the collapse of many forestry MIS companies on
investors and across the broader plantation forest products industry.
It formed the view, however, that 'subject to appropriate standards of due
diligence and corporate governance, the MIS structure and plantation taxation
arrangement should continue to be available to support new plantation
It referred to an issue that had been raised previously, but not addressed by
changes to the tax act following the Plantation Taxation Review—the
appropriateness of the upfront fee model used by most forestry MIS companies
for projects that have a lifespan of 10 years. It stated:
While the main costs associated with a forestry MIS project
are incurred in the first three years, related to plantation establishment,
including forming access roads, site preparation, tree planting and clearing of
competing vegetation, there are also some ongoing costs, such as lease payments
for land, maintaining fire breaks and monitoring for pests and disease. Given
the financial challenges faced by many major forestry MIS companies following
the GFC, questions were asked as to whether forestry MIS companies maintained
sufficient cash reserves to cover these ongoing costs.
According to the Australian Forest Products Association such concerns
and doubts about the viability of established forestry MIS projects could be
addressed. It proposed that forestry MIS companies that accept upfront payments
from retail investors to cover the life of a project 'be encouraged to maintain
a reserve account, with sufficient funds held in trust to cover any ongoing
costs'. As an alternative, it suggested that companies managing retail forestry
MIS projects 'be encouraged to adjust their fee model, to involve a large
initial payment to cover plantation establishment, as well as a small annual
payment to cover ongoing costs such as land lease payments'.
Addressing the particular matter of long-rotation crop, Ms Davis noted
that any future tax concessions need to be considered 'really long and hard'.
In her view, if there were to be tax concessions, they needed 'to be targeted
to the production, not to the tax benefit that comes out at the end'. In
essence, they would need 'to be much more agriculturally focused than commercial-output
driven at the end'.
Trees Victoria also argued that despite the disappointing performance of
a number of MIS, the 'model still has merit and it should not be a case of
"throw the baby out with the bath water"'. It noted that the key
driver for new plantations is Australia's need to expand its commercial forest
plantation estate to meet the forecast future demand for timber and related
Trees Australia observed that in the wake of the MIS collapses, most new
entrants were not interested in establishing new plantations because they understood
the schemes were 'too risky' and the returns not sufficiently high. It noted
that current interest was directed at purchasing and managing the established
MIS estate and 'reaping the rewards of picking up a distressed asset'.
Based on its experience in the forestry business, Trees Australia recognised
the 'difficulty of having any organisation invest in the establishment of new
plantations, without a tangible incentive'.
It explained that the managers of both government and the larger privately
owned plantations have problems finding the funds to re-establish harvested
plantations let alone expand into new areas, and further:
The 'missing link' is investment in the creation of the
plantation and development in the early years. MIS is and must remain one of
the mechanisms for creating new forestry managed investments in Australia.
Overall, Trees Victoria argued that, with improvements to procedures and
better targeting of appropriate investors, the basic MIS concept has 'a valid
and important role to play in the future development of new plantations'.
It recognised that the taxation incentive was a very important factor in
attracting investors and should be 'fine tuned' in order 'to increase the pool
of sophisticated investors who will invest in the long rotations plantations'. Trees
Victoria cautioned that legislation should not generate unintended consequences
The initial focus of MIS on short rotation eucalypt timbers
largely for export has been shown to be the wrong direction. For long term (25
years plus) forestry investments, such as softwood plantations being grown for
sawlogs, the missing link may be the first 15 years of the plantation. Once a
softwood plantation is around 15 years old and been thinned, and is a well-managed
plantation in a location where there are stable long term timber markets, then
those plantations become attractive to the kind of companies which have
purchased the large scale forestry plantation assets in Australia over the past
10 years or so.
AgriWealth also contended that there was nothing wrong with granting a
tax deduction to plant trees. It rejected the notion that the recent MIS collapses
arose because the legislation allowed an investor a tax deduction to plant
trees. It argued that the collapses arose because of the mismanagement by those
entrusted with the responsibility to manage the respective plantations properly.
It also observed that recently institutional investors were 'primarily
acquiring the plantations established by the failed MIS companies'. It reasoned
Those same plantations will deliver significant profits to
their purchasers. There is nothing wrong with the plantations—only those who
could not carry out their stewardship in a commercially responsible manner. The
tax incentive was offered so as to attract capital into establishing plantation
timber—the incentive achieved its actual purpose.
Recognising that many of the individuals who invested in MIS suffered
significant financial losses, AgriWealth suggested tightening regulation around
the actions of financial advisers, including better disclosure, or
alternatively restricting the offer of MIS to wholesale investors only.
Forestry MIS projects form an integral part of plantation
timber production. Whilst institutional investors participate in the
forestry/timber sector they generally enter the sector after establishment risk
has been eliminated. For example, in relation to long-term saw log timber
institutions generally enter the market when the trees are around 15 years of age.
At this time the institutions are able to more accurately determine the growth
rate of timber for each specific plantation and therefore the relevant purchase
price. Their entry occurs after establishment risk has passed.
Institutional investors will not replace individual investors
in fulfilling the need to plant new plantations. Without incentives being
offered to individual investors no new capital will be attracted to new
plantation establishment other than from government.
We consider that the forestry MIS sector is an important and
valuable contributor to plantation establishment, production and the growth of
carbon sequestration. The establishment of more plantation timber in Australia will
benefit rural and regional employment, Australian GDP, Australian self
sufficiency of saw log timber supply and allow Australian individual taxpayers exposure
to a high performing asset class.
Chartered Accountants Australia and New Zealand (CA) supported the
concept of managed investment schemes as they provide 'an option to bring
capital to rural Australia which would not otherwise occur'. It also noted other
benefits such as increased employment opportunities. CA conceded, however, that
aspects of the MIS appeared to 'skew parts of the industry and that the
agribusiness industry grew to become larger than the intended objectives of the
original model and structure'.
Given the apparent distortions caused by MIS schemes, CA suggested that arguably
the schemes 'should only be allowed where there is a national interest element,
such as becoming self-sufficient in wood pulp production, or preventing the
destruction of rainforest in other countries'.
TFS, the biggest sandalwood grower and manager of Indian Sandalwood in
the world, has transitioned from 'a pure MIS operator to a more diversified
business including Sandalwood production and marketing and an institutional
In recent years, it has diversified its funding base to include institutional
investors, arguing that:
...this mix of Institutional and MIS investment is a reciprocal
vindication of this forestry investment model and one that will ensure TFS'
strength as it evolves into an industrial company in a truly Australian
According to TFS, while the MIS philosophy had, in many cases, been
poorly implemented, the socio-economic aspirations that drove it were 'as valid
today as they were at its inception'. In its own words:
TFS has tried Forestry MIS and TFS has succeeded. Investors
and rural communities have benefitted, and are benefitting from the TFS version
of Forestry MIS.
Addressing the potential weakness of an up-front fee model, TFS has
independently introduced measures whereby growers pay one year's management
fees and rent up front. It noted that this measure:
...allows for time to replace the responsible entity in the event
of its failure. Similarly the registering of all leases on title provides a
further measure to protect the interests of investors. These are measures that
could be implemented more widely.
In 2005, the government undertook a review of the taxation policy of
plantation forestry and, in 2008, conducted a review into non forestry MIS.
Since then, there have been major developments that have exposed flaws either
in taxation policy and/or its implementation. Now, with the benefit of
hindsight from the MIS collapses, the committee suggests it is time to examine
the tax incentives and any unintended consequences that flowed from them. In
particular, this proposed review should look at the extent to which the tax
concessions created distortions.
The committee identified numerous factors that underpinned the failure
of a number of high profile agribusiness MIS, which have caused significant
damage to investors, to farmers, neighbouring communities as well as the
overall reputation of agribusiness MIS. In this chapter, the focus was
primarily on the implementation of the policy designed to attract capital into forestry
schemes. There was, however, no single cause for the failure of a number of
agribusiness MIS, but a combination of factors including those related to the
overall policy designed to encourage investment in MIS:
poorly managed implementation of the policy objective;
inadequate tracking of, and reporting on, project performance
resulting in poor quality information available to investors and policy makers;
poor monitoring and understanding of the tax incentives and
whether they were having unintended adverse effects, such as investment in
non-commercially viable products or inflating up-front costs.
As noted earlier, the MIS structure has a number of advantages
particularly the pooling of investment funds to achieve economies of scale.
Should the government determine that agribusiness or forestry MIS warrant
continued government support, then important lessons must be drawn from the MIS
failures. First and foremost, policy makers must have before them solid
research on, and analysis of, the operation of tax incentives offered for
The committee notes that neither the ATO nor Treasury have undertaken a
comprehensive review of the tax incentives for MIS and whether they had
unintended consequences such as diverting funds away from more productive enterprises;
inflating up front expenses; or encouraging poorly-researched management
decisions (planting in unsuitable locations). The committee recommends that
Treasury commission a review to better inform the policy around providing tax
concessions for agribusiness MIS.
The committee recommends further that the proposed review consider the
approach to the incentives offered to investors in agribusiness ventures by
other countries such as the United Kingdom to inform the review's findings and
In addition to the above recommendation, the committee recommends
that the government request the Productivity Commission to inquire into and
report on the use of taxation incentives in agribusiness MIS. As part of its
inquiry, the Productivity Commission should identify the unintended adverse
consequences, if any, that flowed from allowing tax deductions for agribusiness
MIS. For example:
the potential for mis-selling financial products on the tax
the incentive for retail investors to borrow, sometimes
unwisely, to fund their investment;
whether the taxation concessions:
became an end in themselves rather than the business model;
showed up as subsidies to higher cost structures, operations
and/or returns to the operators of the schemes; and
distorted land values and diverted high value farmland into
passive monoculture such as Blue Gums.
The main purpose of the inquiry would be to draw not only on the
experiences of the failed MIS but also the successful schemes to determine
whether there is merit in reforming the system of tax incentives and, if so,
what those reforms should be.
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