Issue # 1412      27 May 2009

Timber! Another shonky scheme comes crashing down

Anna Pha

The collapse of Great Southern (GS) last week and Timbercorp a few weeks earlier, brought to the fore one of the most ill-conceived and destructive government-promoted tax rorting schemes ever. The two companies were the largest providers of managed investments schemes (MISs) offering an array of tax-driven agricultural investments. It is hard to imagine a scheme that could do so much damage.

“In Tasmania, lush diary farming valleys have completely gone under to trees, a direct result of the government’s taxation schemes to establish a forestry industry which would never get within cooee if it was left to market forces,” Sustainable Agricultural Communities Australia founder Robert Belcher said.

Huge upfront tax breaks of up to 100 percent spurred the creation of MISs, mostly attracting wealthy professionals. GS offered “tax-effective” rural investments and finance for investment in timber plantations, cattle almonds, olives, vineyards, etc. Timbercorp offered similar investments.

Investors bought their tax lurks and then sat back waiting for the not inconsiderable returns to flow in when their plantations were cut down for woodchips or crops were harvested.

The companies expanded rapidly, as the billions of dollars flowed in from eager investors, many of whom it seems had not done their homework. At the same time they attracted thousands of shareholders keen to share in the riches and built up combined debts of $1.6 billion, which the banks are now chasing.

Farming communities decimated

The impact on small farming communities was horrific. Cattle farmer Neil Graham is one of many very angry farmers who has been warning the government for some time. “We’re seeing rural communities lost, schools and services closed down”, Neil said in January this year.

“The government has tunnel vision: they think planting trees will solve everything. Both farms and native vegetation are being replaced by plantations, all driven by federally funded tax schemes. It’s wrong.”

Farmers growing the same crops as neighbouring MIS properties could only deduct expenses over the life of their projects. Already reeling from drought, farmers had no hope in hell of competing with MISs and their huge resources and tax advantages. They were disadvantaged and discriminated against in a way that that is nothing short of callous and criminal.

The demise of local farming communities was accelerated as the MISs bought up water licences. Water markets were inflated. Timbercorp owns licences for 160,000 megalitres of water in Victoria, possibly the largest single holder there. Last year the price of water on the market peaked at $1,100 per megalitre before falling back to $300 per megalitre at the end of the season.

The MISs pushed up land prices, forced farmers off their land and destroyed whole rural communities – some were left depopulated, others battled on. Some picked up work related to the new timber plantations and other MIS projects, but their future now hangs in the balance.

The Rudd Labor government ignored protests from the Greens, farming communities, and other organisations. Instead of abolishing the tax rorts the government poured oil on the fire with the passing of its “carbon sink” forest tax legislation last year.

“Over the next 40 years Australia will convert a staggering 84 million hectares of productive food producing agricultural land into tree plantations to fight climate change. That’s over 6,000 hectares a day, seven days a week, 52 weeks a year, every year for the next 40 years”, the Australian Greens warned when the legislation was passed.

“The Greens have opposed the MIS tax schemes from the start as bad for regional communities and bad for the environment. They should be abolished along with the carbon sink forest tax legislation which is an MIS scheme on steroids,” Greens Senator Christine Milne said.

“It is utterly perverse that our native forests, and the carbon and biodiversity they nourish, are still being destroyed while plantations established thanks to tax rorts are left in the ground,” Senator Milne said last week.

“If the government stepped in now to protect our native forests, we would send the wood products industry into the MIS plantation sector where it belongs and help deliver some respite to creditors of these dodgy schemes.

“In the meantime, it is vitally important that the government works with the receivers to manage the plantations left behind and minimise the pest and fire risk unmanaged plantations pose to rural communities.”

Unsustainable rort

Timbercorp and GS were the largest companies providing MIS rural products, covering around 43 percent of the business. There are calls for the government to reveal the exact amount of tax benefits given to MISs. Media estimates suggest that over the last decade around $10 billion was invested with a corresponding $4.7 billion in tax breaks.

Timbercorp and GS’s investors and shareholders stand to lose hundreds of millions of dollars. Their employees and contractors have uncertain futures. As always, the banks are at the head of the creditor queue.

Questions are being asked about the rapid expansion of these companies, and whether they were ever really built on a sustainable basis.

GS is reported as having spent $344 million on marketing and commissions in the years 2000-2008 – approximately 50 percent of the $667 million it spent on agricultural expenses. It had 35 in-house “sales professionals” and a network of 1,100 financial planners and accountants to push its products, according to media reports.

The 300 or so accountants were listed as “authorised representatives” of GS by the Australian Securities and Investments Commission, and received an up-front 10 percent commission on all investments they secured! These were mostly small accountants who would have had the trust of their clients. In fact they were hugely compromised with a conflict of interest when recommending GS’s MIS products to clients.

GS had raised $1.8 billion from 47,000 investors in the past five years alone, with the lure of up to 100 percent tax offsets on their investments. This illustrates how powerful a trap tax rorts are, especially when the Australian Taxation Office has approved the scheme as qualifying commercially for tax breaks.

It also points to the dangers of leaving investment decisions about water distribution, planting of food crops and the future of native forests to market forces.

Footnote: GS donated $40,000 to the ALP prior to the federal election – one donation was just days after the party published a primary industry policy that was positive for the company.

Next article — The cyclical crisis of capitalism - Who will pay for the "recovery"?

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