Breaking down product rulings

You've done all the hard yards for your client. The client has come to you looking for an alternative investment to complement his exist-ing portfolio of investment products. You've been approached by a reputable manager of tax effective projects and agreed to find out as much as possible about the project from the manager. But just to be sure, you commission some independent research of the project both in its financial and commercial viability and the researchers give the project the thumbs up

You've done all the hard yards for your client. The client has come to you looking for an alternative investment to complement his exist-ing portfolio of investment products. You've been approached by a reputable manager of tax effective projects and agreed to find out as much as possible about the project from the manager. But just to be sure, you commission some independent research of the project both in its financial and commercial viability and the researchers give the project the thumbs up. As a final precaution, you check the manager's claim that the project has been given a product ruling, in other words Michael Carmody's team at the Australian Tax Office has granted the project certain tax deductions. The ATO confirms the claims.

But because the application for a product ruling has taken so long, the investment scheme has not been fully subscribed and the winery you invest in will only be planting 5,000 seedlings rather than the 6,000 sanctioned in the application to the ATO. A couple of years later, it is becoming obvious that the project in which a significant has been invested is unlikely to produce the returns your client had hoped for, in fact it seems to be on the verge of collapse. But to rub salt into the wound, your client is sent a letter by the ATO sug-gesting the tax deduction claimed for the investment is under review because there were less seedlings planted than was contained in the application. Worse still, the ATO is considering imposing a penalty on your client.

Sounds like a nightmare? Well, according to industry pundits, a sce-nario just like this could happen with the uncertainty still sur-rounding the tax office's product ruling system. They are concerned that a product ruling may be granted for a project and then revoked if there is a slight change in the project.

The industry is also concerned that the term "product ruling" may be confusing to both investors and their advisers.

"If we use the legal reasonable person test, the term product ruling could be construed to mean that the project has been approved," says Northwood Capital Markets principal Rod North.

"But it means nothing of the sort. All it means is that the project has deduction approved by the ATO. In fact, I would say that only about 30 per cent of projects which have already received product rulings are worth investing in.

"The concern is that once an investment receives a product ruling, it is effectively sanctioned by the ATO, therefore the perception is that the usual due diligence will not be required by investors and some financial planners."

Tax commissioner Michael Carmody has made it quite clear that will he accept no responsibility in relation to the commercial viability of a project under the product ruling system. The ATO has also frequently publicly stated that product rulings are not an endorsement in any way of the project's commercial or financial viability.

The industry hopes the difficulties with perception and uncertainty are the result of teething problem. It is the first year that the product ruling system has been in place and the ATO has been inun-dated with a huge number of applications for rulings. And the agri-cultural investment industry has thrown its weight behind the concept on product rulings as a means of providing some sort of security for a claim that investors in a project may be entitled to favourable tax treatment.

But many in the industry are concerned that only a limited number of projects will be approved by June 30. Only about 40 from 700 applica-tions have been approved so far. Some project managers have criti-cised the tax office for not backing the product ruling system with adequate resources to process the influx of applications. The Austra-lian Society of CPAs (ASCPA) attacked what it called the "ramshackle system" of evaluation.

For its own part, the tax office has expressed frustration with the quality of the applications it has received, blaming promoters for the delay.

Break-out box:

Product rulings granted so far:

'The Magic Pudding'

Great Southern Blue Gum Project No. 2 Prospectus No. 5

Australian Eucalypt Project 1998

1999 Timbercorp Eucalypts Project

Hillston Grove Vineyards Project

ITC Eucalypts 1999 Green Triangle Project

The Australian Blue Gum Trust No 8

Queensland Paulownia Forests Project No 3

Australian Eucalypt Project 1999

ITC Eucalypts 1999 West Australian Project

Goulbourn Valley Orchards Project

Australian Hardwood Management Project No 2

The Great Forests 1999 Project

The Paulownia West Coast Project No 2

Macquarie Enhanced Index Trust

Australian Irrigated Timber Project No 1

Heydon Park Tea Tree Project

Mobandilla Cotton Project No 2

Great Southern Blue Gum Plantations 2000 Project

Summerhill Orchards Project No 1

Norfolk Ridge Vineyards Project

Injury Management Solutions Partnership

Tarwoona Olives Scheme No 1

Limeston Hill Vineyard Project

Preston Vale Vineyard Project

Murtagh of Rutherglen No 3

Tasmanian Forest Trust No 7 Project

Beechworth Winegrape Project

Barkworth Olive Groves Project No 3

Karri Oak Vineyard Project No 2

Margaret River Wine Business

Brookhampton Estate Vineyard Project

Australian Blue Gum Project 1999

Paulownia Forestry Project No 2

Source: Northwood Capital Markets