Tax breaks stay, but the crop of horticulture projects dwindles

Agribusiness managed investment schemes (MISs) have attracted a number of enemies during their short lifespan, in particular the farming lobby, which thought city investors claiming tax deductions for planting trees and grapes was wrong.

They argued these investors were not real farmers and neither were they running a business. The Australian Taxation Office (ATO) also felt too much tax was being claimed by investors in these schemes.

But the MIS industry had some friends in the former Howard Government and there was only a slight amendment to the tax laws on tree investments.

Horticultural investments were more severely dealt with as the ATO stopped issuing tax product rulings on these schemes at the end of June last year.

It also launched a test case to see if the MIS tax treatment was justified. For once, the ATO lost and announced it was not going to appeal.

For horticultural MIS it was back to business as usual.

McMahon Clarke Legal partner Langton Clarke said forestry schemes were never going to be affected by the court case, but now horticultural managers could again set up schemes under the old rules.

“Since July 2007, the forestry sector has had to satisfy certain rules on ensuring the trees were planted before the end of the financial year to enable deductions to take place,” he said.

“Also, investors didn’t have to convince the ATO they were running a business, so these were fundamental changes.”

However, the process of getting product rulings out of the ATO hasn’t become any easier, Clarke said.

There were instances of the ATO issuing product rulings in mid-June last year thereby ruining a manager’s chances of achieving any sales.

Agribusiness investment schemes have always been sold from March to June 30, as they have often been used as an end-of-year tax planning tool.

The changes to the forestry tax rules nearly two years ago have also created a secondary market for units in timber schemes.

Clarke said under previous tax laws it was incongruous for an investor to be in a long-term forestry plantation business and move freely in and out of the scheme.

“Now investors can sell their interest on certain conditions, one of which is they hold the units for at least four years,” he said.

“An initial investor who sells their forestry interest must include the market value of that interest in their assessable income.”

Another important condition for the first investor in a scheme concerns a sale in the four years after the initial investment.

Clarke said if there was a sale in this four-year period, the deductions claimed by the investors, both upfront and ongoing contributions, would be denied.

However, an investor buying these units would receive a 100 per cent deduction for their ongoing contributions, such as management fees.

The secondary investor would eventually receive the benefits of timber sales as most schemes come to maturity about 10 years after the initial investment.

These sales would be treated as assessable income as long as the proceeds match the net deductions, he said.

Where the sale amount exceeds the net deduction, the proceeds will be treated as assessable income.

“But secondary investors must remember they will not be allowed to claim the acquisition cost of buying the units on the secondary market,” Clarke said.

Despite the change in the tax treatment of forestry schemes almost two years ago, there have been few sales of investments into the secondary market.

“One reason for this is the inherent complexity of forest scheme investments and their structure,” he said.

“This complexity flows over to a sale of an interest in a forestry scheme.”

But testing the tax rules on both forestry and horticultural schemes through a court case has brought benefits.

The court case had delivered respectability to the MIS industry, Kimberley Timber Corporation managing director Rick Ferdinands said.

“I think the product ruling legislation was at last tested and confirmed by the court case,” he said.

“For us, launching our first (retail) MIS product, this case gave us certainty to proceed.”

Ferdinands said the company had run a couple of wholesale African mahogany timber schemes in the past couple of years.

The court case had created an opportunity for the manager to move into the retail space, he said.

Adviser Edge Investment Research managing director Shane Kelly said the court case was a win for the agribusiness industry, but the ATO hasn’t totally lost.

“There is only about $110 million of non-forestry products being offered this year compared to $400 million last year,” he said.

This has been attributed to many smaller horticultural managers abandoning schemes for this year because of the uncertainty created by the court case.

The December court case ruling left the managers little time to prepare a product, and obtain a product ruling from the ATO so they could be sold before the end of the financial year.

“In a sense, the ATO achieved their goal of reducing the number of schemes,” Kelly said.