Australian Greens—Dissenting Report
The boom and bust in forestry managed investment schemes (MIS) is an
almost perfect reflection of the boom and bust in the United States mortgage
market that precipitated the global financial crisis (GFC). The core ingredients
are all there: political backing at outset; highly leveraged investors enticed
by advisors receiving outrageous commissions; irresponsible lending by
supposedly venerable banking institutions; ratings agencies providing fanciful
evaluations; overstated yields; and inflated asset prices. Along the way alarm
bells were sounded and ignored by successive governments, and then the cards
came tumbling down. Forestry MIS was Australia's GFC moment.
Forestry MIS was designed to encourage investment in timber plantations
on the back of aggressive government policy to treble the amount of timber
plantation in Australia. MIS managed to do with varying degrees of success. It
went from being a relatively obscure financial instrument when formally
established in 1998, to attracting more than $4 billion worth of investment.
Eighty per cent of that investment flowed during a heady five year period from
2004 to 2008. However, it was a Ponzi scheme, and when it collapsed tens of
thousands of ordinary Australians lost their money; a network of fast-and-loose
financial practices were exposed; and farming communities around the country
were left reeling by the rapid takeover and then abandonment of agricultural
Forestry MIS is perhaps the most complicated and intricate of what are
now a series of financial scandals that have been uncovered in Australia since
the GFC. These misdemeanours have been the subject of number inquiries by this
committee, including ongoing inquiries into the conduct of financial advisers and
penalties for white collar crime, and the inquiry completed in 2014 into the
conduct of ASIC. The ASIC inquiry recommended that the government establish an
independent inquiry—possibly a Royal Commission—into the misconduct of advisers
and planners within the Commonwealth Bank. Since that time, instances of
misconduct have been also been uncovered at the National Australia Bank, ANZ
Bank, Macquarie, IOOF and, again, at the Commonwealth Bank. The Greens believe
that the grounds for a Royal Commission into the financial services sector are
now irrefutable, for the sake of the hundreds of thousands who have been
affected, and for the integrity of the financial system. This report into the
collapse of forestry MIS should be used as a further opportunity to highlight
the need for the highest level of scrutiny to be applied to how Australian's
money is being managed.
That the government establish a Royal Commission to examine
misconduct within the financial services sector.
Investors and incentives
Pooling funds from investors is usually more easily achieved
with either a company or a commercial trust. The only reason the current MIS
structure was chosen was to enable growers to get a tax deduction for their
The Chair's report seriously underplays the role that taxation
incentives provided in fuelling the forestry MIS bubble. The Chair's report's
inadequate response to this issue is the principle reason The Greens have
submitted a dissenting report.
While it is true that a number of investors claimed not be have been
motivated by taxation incentives, the tax treatment of forestry MIS underpinned
confidence in the entire system and was clearly identified by ASIC as the most
common reason for investment in MIS as early as 2003, before the bubble.
Taxation incentives induced demand among investors looking for a vehicle
to write-off a lump-sum amount against their income. On the other side of this
equation, the upfront payment made by investors provided easy finance for
parent companies to establish forestry MIS so long as the responsible entity
could provide the illusion that investors were carrying on a business.
Taxation incentives also gave assurance to banks to lend money—at full
recourse—for investment in forestry MIS; and commission structures encouraged
the sale of forestry MIS to people ill-equipped to understand the product risk.
The increase in investor demand for forestry MIS inflated the demand for
land for forestry. This contributed to localised increases in the price of land
which, in turn, encouraged trees being planted on unsuitable land. With the
assistance of drought conditions throughout the period of the forestry MIS
bubble, and the inevitable downturn in the value of pulp as a global commodity,
this meant that the value of the underlying asset was not able to support
investor claims when forestry MIS collapsed: too much was paid for land on
which trees didn't grow.
The business model was fundamentally flawed, and new tax-driven
investors were required to keep up the charade; to keep cash flowing. Forestry
MIS became a Ponzi scheme.
The ATO sought to address the perverse tax incentives in 2006 by
recognising contributions to forestry MIS as investment in capital. However,
the Federal Court found differently, and the government of the day chose not to
protect the ATO's view in law. Instead, the then government legislated a
specific workaround for forestry MIS that allowed for 70% of investment to be
deducted upfront without even having to prove the carrying on of a business.
Even so, the mere questioning of the validity of MIS tax breaks during
this period was enough to act as a catalyst—one of a number—for the collapse of
forestry MIS. This puts paid to any suggestion that taxation incentives were
not at the heart of the forestry MIS bubble: if tax mattered so little, then
why was the threat of any change to the tax deductibility of investment so
The recommendations in the Chair's report for Treasury and the
Productivity Commission to review tax incentives for MIS would assist in
understanding this question better, but they also further avoid a decision on
this issue. It is clear that the upfront deductibility facility available
through MIS was—and is—a primary incentive for investment in unviable plantations.
The Greens believe that the rationale provided by the ATO in 2006 remains valid
and that the committee should seek to have this view enshrined in law to
prevent another MIS bubble.
That the government should legislate to require investment in
forestry MIS to be treated as investment in capital, and for tax deductions to
be spread across the life of the asset.
While the economic story of the collapse of MIS has been laid bare, the
political story that sits behind it has not been fully told. Serious questions
remains as to why the government didn't act when alarm bells were sounded. Why
did cabinet overturn the recommendation of the Minister to change the tax
incentives in 2006? What was the role of industry lobbyists in convincing the
government to keep forestry MIS and a highly ambitious plantation target? In
Tasmania, what was the role of the proposed Tamar Valley pulp mill in providing
A litany of reports signalled problems with forestry MIS, including the
aforementioned 2003 ASIC report; the 2004 Senate Regional Rural Affairs
Committee report into the veracity of the government's plantation targets; the
2009 Parliamentary Joint Committee on Corporations and Financial Services
Inquiry into MIS; and the 2012 Corporations and Market Advisory Committee
report into MIS.
It is disappointing that the Chair's report has made little mention of
the political failure to prevent a the forestry MIS bubble. That said, it
beyond the powers of this committee to compel the witnesses and evidence that
is necessary to properly understand the role of vested interests in the boom
and bust of forestry MIS. The committee was unable to get company management,
accountants, financial planners or rating agencies to appear at public
hearings. These people have stories that the mums and dads who lost their
money, and the farmers who are left saddled with debt, deserve to hear. This is
why a Royal Commission, with all of its coercive powers, is needed into the
financial services sector—including forestry MIS—to understand the culpability
of government: what did they know, when did they know it, and what did they do
A Royal Commission is all the more important because, it would appear,
that the majority of actors involved in the collapse of forestry MIS did not
actually break the law. It is extraordinary that billions of dollars of value
and wealth have been wiped out around this country on the back of an asset
class that, essentially, the government set up. A lot of people made a lot of
money along the way, but it is not clear that there was, technically, any
systemic wrongdoing. The laws covering forestry MIS largely relate to whether
there was misconduct, or deceptive behaviour, or fraudulent behaviour around
the communication of risk; otherwise it was just a really bad investment.
A Royal Commission will help provide a better answer to victims than 'sorry,
it is not illegal for billions of dollars to be wiped out and lots of people to
have made money on your behalf'. A Royal Commission will establish who was to
Promoters and producers
The Chair's report makes a swathe of recommendations covering the
regulatory framework for financial advice relating to forestry MIS. These
include recommendations relating to the use of ATO product rulings; clarifying
the role of accountants; ethical and educational standards for advisors;
preventing banned advisors from managing companies; improving product
disclosure requirements; and extending consumer credit protections.
More often than not, these recommendations sit within the broader
regulatory framework covering all financial advice. There has been a lot of
progress on these and a number of other issues in the eighteen months since the
inquiry into forestry MIS was established. This is a result of the work of the
other aforementioned inquiries undertaken by this committee, and the government's
own Financial Systems Inquiry.
In this context, the recommendations in the Chair's report, while
laudable, often use unnecessarily forgiving language. On no less than eight
occasions, the Chair's report suggests that 'government consider' the content
of particular recommendations. The lack of conviction in the Chair's report is
disappointing given the level of progress made in relation to consumer
protections for financial advice, and fails to adequately respond to the
gravity of issues raised during this inquiry.
One the recommendations where the Chair's report fails to show
conviction is in relation to the regulation of 'full recourse' loans. As noted
earlier, the ability of investors to borrow the full amount of their investment
in forestry MIS contributed to the creation of an asset bubble; and, because of
the full recourse nature of the loans, dramatically increased the exposure of
retail investors to losses when the bubble popped.
That the government legislate such that only limited recourse
loans are able to be provided for investment in complicated financial products.
Of those recommendations that do demonstrate conviction, one sits out as
being bizarre. Recommendation 4 details the changes that should be made to the
school curricula to improve the financial literacy of school leavers. While
this is worthwhile in and of itself, it is completely incongruous to the
findings of this inquiry. In the Chair's reports own words 'agribusiness MIS
are complex products and difficult to understand'. In evidence provided by
ASIC, they stated that:
...the number of failures and the size of those failures go to
the fact that it certainly has not been an investment class that retail
investors could have confidence in.
In other words, forestry MIS was a highly risky financial product that
many banks themselves considered unworthy of investment; and it should never
have been sold directly to mums and dads. While The Greens have every faith in
the ability of the next generation of Australians, changes to the school
curriculum will not stop another forestry MIS.
Senator for Tasmania
Navigation: Previous Page | Contents | Next Page