Back to the future for tax schemes’ new fight

Just as one battle ends, it may well be that another is beginning.

Last week, Australian Tax Commissioner Michael D’Ascenzo made a submission to a federal parliamentary inquiry into tax issues, stating that 98 per cent of some 42,000 cases involving tax-effective investment schemes had been finalised.

Barely 1,000 remain in the courts, with most people deciding to pay up, one way or another.

“The vast majority of taxpayers have settled with the tax office and moved on with their life,” Mr D’Ascenzo said in his submission.

“Court decisions have, in the main, confirmed the disallowance of the deductions claimed in respect of those schemes.”

This ends a long-running battle not just for the investors, at least half of whom were thought to be Western Australians, but also for the ATO, which found that challenging so many people created a significant political groundswell.

In electorates such as Kalgoorlie it became a serious issue.

It was the Goldfields where promoters in the 1997-1999 period made big money marketing schemes – some sensible, some not so – to  miners, who often made very unsophisticated investors, despite their top-bracket incomes.

“Our experience with these schemes has taught us a great deal about taxpayers behaviour, and our own responsiveness to new and emerging schemes,” Mr D’Ascenzo said.

“We have developed new products, capabilities, and intelligence to help guide taxpayers to avoid the pitfalls of schemes that are ‘too good to be true’.

“This unfortunate episode, which involved many ordinary taxpayers, has also raised the attention of others, such as the tax profession and their representative bodies, to their responsibilities to the broader community.”

Many of those caught up in this mess had invested in a series of tea-tree projects under the Budplan name.

It was the ATO’s attack on these investments, promoted heavily in WA, that first turned the tables on the tax collector – with the resulting pressure prompting a Commonwealth Ombudsman’s report on the review of ATO activities related to the Budplan scheme, released in June 1999

It was the first of 11 formal external reviews by various official bodies into the area of aggressive tax planning since then – often with accusations from industry that the ATO was simply using scare tactics to prevent people investing in anything that might lessen their taxable income.

Eventually, what emerged was a compromise – and the managed investment scheme was born.

Legitimate promoters have, for the past few years, lived with a system of product rulings, whereby the tax office gives a rudimentary tick of approval showing that, on the face of it, the prospectus meets its conditions.

Some in the industry complain that tax office delays in the release of these rulings can affect sales.

The ATO also does follow-up audits of MIS schemes to make sure they have followed what they said they would do in the prospectus – with the implied threat that a change that doesn’t meet tax office guidelines may jeopardise the deductibility of the project.

But just as this cosy compromise provided some equilibrium for the industry, a new threat is emerging: the rural constituency.

MIS timber plantations were often the target of complaint in areas such as Albany, where active farms were replaced with thousands of hectares of seemingly dormant forest. Populations were denuded, feral animals ran wild, aerial spraying was inaccurate and bushfire risks were heightened.

A decade or more on, regular harvesting has brought some life to these regions and made the natives less restless.

But the MIS players have moved into new fields, rocking the boat with competition that many regard as unfair. Timber and vineyards were something we needed more of, olives were a new industry, but horticulturists in sectors like avocados and tomatoes are being squeezed by the large scale-new plantings, flush with city-based MIS money, which are turning their markets upside down.

The irony is that tax deductions designed to help farmers have now been financially engineered to force them out of business.

Adviser Edge managing director Shane Kelly is one who believes there is a new air of doubt surrounding MIS.

“There now appears to be considerable uncertainty surrounding the federal government’s position on agribusiness MIS schemes, with a major review of the entire sector now appearing very likely,” Mr Kelly said.