Report Examines Tax Breaks For Managed Investment Schemes In Australia

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

10 September 2009

Australia’s Parliamentary Joint Committee on Corporations and Financial Services has reported on the impact of past and present tax arrangements that apply to agricultural managed investment schemes (MIS).

The Committee stated that the MIS structure is used for a wide range of investment options, including cash management trusts, equity trusts and property trusts, but that they are generally structured as unit trusts.

It estimated that overall funds invested in MIS are around AUD350bn (USD300bn), of which agribusiness MIS represent some AUD12bn. Agribusiness MIS are divided into forestry and non-forestry schemes.

Apart from a period between 2006 and 2008 regarding non-forestry schemes (resolved by a Federal Court decision), the Australian Taxation Office has allowed up-front tax deductions for investment in agribusiness MIS under provisions of the Income Tax Assessment Act (ITTA).

In practical terms, the rule means that investors in agribusiness MIS can defer some of their tax liability until the investment pays returns, which may occur when they have ceased to earn income in the higher tax brackets, thus minimising their overall tax liability.

The Committee’s inquiry was established following the collapse, earlier this year, of Timbercorp and Great Southern, both non-forestry agribusiness MIS with total funds invested of over AUD3bn.

The Committee heard a number of complaints about the potentially market-distorting effects of the tax incentives available to agribusiness MIS investors. It was argued that, rather than investment flowing to commercial activities on the basis of profitability, tax incentives had generated an influx of investment to agribusiness MIS that would have been directed elsewhere had they not been available.

However, from a forestry MIS perspective, it was also said that 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.

With declining government participation in the sector, forestry MIS tax incentives have served as a popular vehicle for stimulating private investment. MIS structures are now said to account for approximately 34% of total forest plantations in Australia.

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.

Its recommendation was therefore that the government should consider investigating the effects of amending the ITAA to ensure that tax deductions for non-forestry agribusiness MIS investment under the general business deduction provisions of the ITAA are only permitted to be offset against future taxable income from the same MIS.

On the other hand, it considered that there are more pressing arguments for tax deductibility for investment in forestry MIS. The long lead time and one-off character of forestry income events discourage investment in the industry and, it considered, warrant the retention of the existing arrangements.

Following the issuing of the report, Australia’s Assistant Treasurer, Nick Sherry, said during an ABC radio interview that the government will look at the Committee's recommendations, as well as the future advice from the Henry Tax Review, due by the end of the year.

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