Australia Clarifies Forestry Managed Investment Tax Rules

by Mary Swire, Tax-News.com, Hong Kong

26 October 2009

The Australian government has announced a proposed legislative amendment to protect around 19,000 investors in forestry managed investment schemes (MIS) from an unintended and adverse tax outcome.

The government announced that it was aware that the collapse, earlier this year, of MIS managed by Timbercorp and Great Southern is expected to lead to a number of forestry MIS being wound up or restructured. That could cause investors to fail the current requirement of having held their interest in the MIS for four years as a condition of an up-front tax deduction.

The Australian authorities revealed that they will now amend this four-year holding period rule for forestry MIS to ensure that it cannot be failed for reasons genuinely outside an investor's control. The government will release draft legislation for public comment.

Assistant Treasurer, Nick Sherry, explained that: "The four-year holding rules were introduced in 2007 as part of a package to regulate secondary trading of forestry interests. Many of the investments in question were made before this holding requirement was put in place – at the time they decided to invest, these investors had no way of knowing that their deductions were at risk. The government doesn't consider that to be a desirable outcome, as it unduly penalises investors for events outside their control."

"Accordingly, we will amend the tax law to allow an investor's deduction to stand where the four-year holding rule is failed due to events beyond the control of the investor,” he continued.

"These events include insolvency of the MIS manager, the death of the investor or where an MIS interest is cancelled, for example because of trees being destroyed by fire, flood or drought."

The government will also amend the law to ensure that civil penalties can still apply to the promoters of forestry MIS notwithstanding that the investors' deductions are allowed to stand because of the amendment to the four-year holding rules.

The promoter penalty provisions are an important integrity measure designed to discourage the implementation of schemes covered by an Australian Taxation Office product ruling in a way that is materially different from the product ruling.

As the holding period rules apply only to investments in forestry MIS, investors in other agribusiness MIS are not affected.

A parliamentary committee, reporting last month on the impact of the tax arrangements applying to all agricultural MIS following the collapse of Timbercorp and Great Southern, had formed he opinion that, from a forestry MIS perspective, tax deductibility is an important component of the industry’s development strategy, aimed at trebling Australia's plantation timber output by 2020 to meet future paper demand.

The committee concluded that, on balance, the tax deduction for non-forestry MIS under the general business deductions rule is not unreasonable where there is a clear focus on scheme profitability, rather than exploiting tax breaks.

The long lead time and one-off character of forestry income events discourage investment in the industry and, the Committee considered, warrant the protection of the existing arrangements.

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