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Barriers cleared

THE Australian Tax Office has had a dramatic impact on the tax-effective investment sector over the past two years.

However, participants in new projects can feel confident that a favourable tax regime will apply to their investments.

The industry was hit hard by two key decisions – last year’s retrospective crackdown on mass marketed ‘tax abusive’ schemes and the removal of the 13-month rule in November 1999.

The former decision targeted pre-1998 schemes but adversely affected investor sentiment towards all tax-effective agricultural schemes.

The latter decision was part of the Federal Government’s business tax reforms but had unintended consequences for the plantation forestry sector. It was a major contributor to last year’s collapse of Australian Plantation Timber.

The good news for investors in new projects is that announcements by the ATO and new legislation have addressed both of these issues.

The tax office crackdown denied billions of dollars of tax deductions claimed by up to 65,000 investors.

It targeted pre-1998 schemes that, in the ATO’s view, had little commercial basis and artificially created large tax deductions via measures like ‘round robin’ finance arrangements and partial or non-recourse loans through related finance companies.

Schemes marketed since 1998 are governed by the Managed Investments Act and can obtain binding product rulings from the tax office.

The product rulings have removed most of the uncertainty regarding eligibility for tax deductions.

This was confirmed by Tax Commissioner Michael Carmody last August, when he stated that: “Investors will be entitled to tax benefits they claim for investments with a valid Tax Office Product Ruling, provided the investment is implemented in the manner described in the Product Ruling”.

The introduction of a 12-month prepayment rule gives forestry managers a lot more flexibility and allows them to better plan their land, seedling and contractor requirements.

It means that investors in plantation projects can invest money and claim a tax deduction in, say, June 2002, yet the manager does not have to plant the seedlings until June 2003.

This effectively is a return to the rules that applied up to 1999. In the intervening two years, managers have had to establish plantations in the same financial year as the tax deductions were claimed.

It meant that managers had to close their prospectus up to one month before June 30.

Australian Plantation Timber ran into problems because it borrowed money to purchase land for expected plantings. However, the plunge in investor interest left APT with surplus land and a debt it could not service.

Investors affected by the tax office crackdown have until May 29 to accept a settlement offer.

In the meantime, a number of test cases before the courts are seeking to clarify the situation.

The first ruling, handed down last month on the Budplan projects, was hailed by the ATO as vindication of its stance.

However, law firm Wilson & Atkinson, which represents many investors, disputes this interpretation.

Its view is that the Budplan decision is “not applicable to clients in the majority of agricultural and franchise projects which we represent”.

“This is because the Budplan projects involved expenditure for research and development-related activities, which are not present in most agriculture and franchise projects,” the company said.

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