“Deduction is the driver, not production,”said Senator Bill Heffernan, “therefore, it distorts investment in agriculture.” Now is not the first time tax incentives have unfairly skewed the marketplace. In many respects, Heffernan is right and we, as advisers, have become part of a problem of a misallocation of resources in this country. The corporate promoters of these schemes are making a profit even before the first seed is planted and family farms can’t compete against that. Heffernan has said managed investment schemes (MIS) corrupt the capital base of agriculture, and now Assistant Treasurer Peter Dutton has moved to end the existing tax arrangements for non-timber MIS.
After a decade of growth in the volume of business written, MIS have been dealt a severe blow with the recent Federal Government announcements. The Government is no longer going to accept that investors in MIS can claim an up-front tax deduction for their contribution to the schemes on the basis they are ‘carrying on a business’. This naturally is going to have an impact on businesses set up to distribute this type of product, but when we step back from the obvious commercial ramifications of supporting them, we should be asking if this is a business advisers should legitimately be involved with in the first place.
Our role as advisers is to assist investors to save and put their capital to the most effective use. Typically, many of the MIS were promoted on the back of high commissions and sales incentives that encouraged many advisers and accountants to specialise in this area. It is arguable that without the tax incentives, very few advisers or clients would be interested in committing their capital here instead of into more solid and diverse capital markets.
There is a four-month window given for those in the process of investing in the sector, but after June 30 only timber projects will be allowed the up-front deduction as long as 70 per cent of the expenditure is directly related to forestry. With more than $1 billion invested in the agribusiness sector in 2005/06, it is a substantial industry sector. This has occurred despite a history of ASIC and the Australian Taxation Office focusing attention on unscrupulous operators, and it was obviously only going to be a matter of time before the Government said enough is enough.
It is interesting these changes have come at a time when superannuation has gained the ascendancy as the preferred tax management vehicle. The recently legislated incentives for using super as the vehicle of choice for retirement savings has created a bonanza for advisory practices specialising in this area. Investment in superannuation gives the benefit of an up-front tax deduction and provides capital to markets without the distortions inherent in MIS and negative gearing. It is obvious superannuation is winning out at the expense of other forms of tax management.
Some business operators will be hurt by the Government’s decision. The day after the announcement, more than $400 million was wiped off the largest listed agricultural schemes. Some transition rules may be introduced to soften the pain on these operators, but nothing has been forthcoming yet. There will no doubt be some ramifications for everyone involved, but the decision should cause advisory practices to think through the place MIS should be playing in their suite of offerings. Practices that have relied too heavily on selling the tax benefits of these schemes to the detriment of other areas of advice will suffer.
The very fact there is talk of collapse in the sector is evidence the boom was artificial and driven by the tax incentives alone. There are too many in the rural sector that have seen land prices soaring out of reach of their ability to compete. Heffernan has said MIS corrupt the capital base of agriculture. Liberal MP Wilson Tuckey, on the other hand, has been championing continuation based on the ability to win more votes and he may yet lobby for transitional arrangements.
The four months until June 30 will no doubt see a rush by some advisers to place clients into schemes for one last fling of the dice as well as a rush to maximise the superannuation contributions with up to $1 million of undeducted contributions. MIS may be used to offset the capital gains tax liabilities arising from assets being sold to transfer into the tax sheltered super environment, but caution will need to be exercised that the schemes being supported have the ability to continue operation in following years when they no longer have the crutch of the tax incentives and additional inflows of money.
Perhaps this is the end of an era where tax schemes being sold on commission were the bread and butter of a lot of accountants and advisers. The profession has moved on in the past couple of decades and the six-step process of financial planning followed around the world is now much more firmly entrenched as the mainstream of what we do.
