Christine Milne (Tasmania, Australian Greens) Share this | Hansard source

I rise today to make some remarks on theTax Laws Amendment (2010 Measures No. 1) Bill 2010. I particularly want to comment on the forestry managed investment schemes part of the legislation, and to note that what this particular amendment is doing is protecting the right of a taxpayer to claim and retain a deduction for investment in forestry managed investment schemes where the four-year holding rule is breached for reasons outside the taxpayer’s control.

Clearly, this is being brought in because of the failure of a whole range of managed investment schemes—in particular, Great Southern, Forest Enterprises Australia Ltd, Timbercorp, Environinvest, Radiata Plantations Ltd, and on and on the list goes. We all know that, because of the recklessness of the managed investment scheme product, we have a situation where investors got an upfront tax deduction. The government moved to bring in an integrity measure saying that you had to hold that investment for four years so that people did not just move in, take on the investment, get the tax deduction and move out.

In my view, we should have abolished managed investment schemes altogether. That is still my view. I would be very interested to know why the government maintains their support for forestry managed investment schemes when we have a glut of wood product from one end of the country to the other and one end of the world to the other. Now is the opportunity to protect our native forests if we want to have any value at all left in this wall of wood that is now in Australia. But, having said that, the situation we now have is to protect those people who made their investment in these managed investment schemes, and they are not the ones who sold out of them—rather, the company that they invested in collapsed.

In talking about these managed investment schemes, though, I think we need to go a lot further than we are here. We really need to ask: what is the role of the tax commissioner and the discretion that the tax commissioner offers in relation to these particular products? I am aware that, in 2000—and this is from a paper by Dr Judith Ajani—the government responded to the Ralph review of business tax with, amongst other things, division 35 amendments aimed at removing the practice of presenting consumption expenses for non-commercial activities as business expenses. That led to a test on division 35 rules for commerciality.

The test was that business people had to pass one of the following: that they had an assessable income from the activity of at least $20,000, or had produced a profit in three out of the past five years, or used real property or an interest in real property worth at least $500,000 on a continuing basis, or used other assets worth at least $100,000 on a continuing basis. Leaving aside very important arguments about the commerciality test’s arbitrary and inequitable nature and scope for improvement, a review of matured hardwood plantation MIS investments would probably find that most of them failed the first test, and probably no plantation MIS investor would pass the other three tests.

So what has happened is that plantation MIS investors have received dispensation from division 35, with the ATO commissioner exercising discretionary powers in specified areas. The commercial loss provisions, which are specifically addressed in product rulings, require the tax office to consider the commercial viability of plantation MISs. And, in using his discretionary powers to give plantation MIS investors the right to deduct investment costs against income earned from other activity, the commissioner must have judged that plantation MIS investments are inherently commercial by some criteria. But we have no publicly available data on the tax office’s operation of division 35.

Since 1998 we have had a series of tax commissioners. They have all used their discretion to give a product ruling, essentially, on these managed investment schemes. It is a tick for the tax concession, and therefore it is also a tick on viability—it is sending a clear message to investors that the tax commissioner has made a judgment that these must be viable financial investments to have achieved the product ruling and to have achieved the tax concession.

So I think it is really about time, as Dr Ajani points out in her paper, that we had a really good look at the tax office and the commissioner’s rulings and discretionary power, and at the reasons why that assessment of viability was made, when we have had, subsequently, collapses from Great Southern, Forest Enterprises, Timbercorp, Environinvest, et cetera. How could the tax commissioner have been giving, essentially, this nod of approval about financial viability when, clearly, that has not stood the test of time?

Dr Ajani argues:

To create the information for policy debate and policy making, evaluation and monitoring, it is recommended that:

1.

Treasury and the ATO conduct five-yearly reviews (with the first to be undertaken immediately) of the process and information used to rule on plantation MIS dispensation from Division 35 commerciality tests.

2.

The ATO, ASIC, Treasury and Productivity Commission establish a publicly accessible plantation MIS reporting and monitoring system where, at a minimum, the key variables—return on investment, wood yield and woodchip prices—are tracked over time for each project.

and that:

3.

The Productivity Commission’s ERA estimates be expanded immediately to include assistance through plantation MIS using, in the first instance, Approach 1—tax deduction for true costs only.

I think we really have got to the point where we need some explanation from the tax office and the tax commissioner as to the basis for their discretionary use or interpretation of that particular section of the tax act. I would be very interested in the division 35 rules in trying to understand what criteria were used for judging that plantation MIS investments are inherently commercial. We have never, ever seen that from the tax office, but it is about time we did because a lot of people have lost out through this process in rural and regional Australia. It has led to a complete distortion in land use. It has led to a clash between food security and wood product, and now we have what is a complete collapse in the wood products industry around Australia. This is probably one of the biggest examples of a public policy disaster that Australia has seen, and certainly as rural and regional Australia see it at the moment. When you look at the complete collapse of the timber industry and the whole of the forest products industry in Tasmania, you can sheet home a lot of the blame to a complete failure to look at the market realities of the wood products industry globally and the failure to recognise the glut and the distortional influence of managed investment schemes.

I also give notice that I will be moving an amendment to this legislation in the committee stage to abolish the tax deductibility for carbon sink forests, given what I have just said in relation to the glut of wood products around the country and because of the need to test the tax office ruling in relation to whether the upfront costs of land are incorporated in the tax deduction. I recognise that there is a statement saying that they are not, but we will wait and see what a court has to say about that, given the way that that has been packaged and the advice I have from a leading tax barrister in that field who is looking at the law. It is very clear to me that, if we are to have carbon sink forests in rural and regional Australia, they must be biodiverse and permanent, not some other dodge for yet another excuse to go in with monoculture plantations and again make some sort of profit out of that distortional influence in rural and regional Australia, particularly as it pertains to land prices and, as is coming down the line, food security.

Today we have a report on the loss of biodiversity across Australia. It is 30 per cent less than we had in 1970 and, at that rate, we will be losing all species by the end of the century. It is a pretty sobering kind of analysis of what is going on with our wildlife around Australia. What we desperately need in the face of climate change, peak oil and this species crisis are policies that lead to the restoration of ecosystems, the maintenance of existing ecosystems and the protection of existing carbon stores in terms of forests and native vegetation, not some distortional policy, such as the government has in place here, which is yet another example of having monoculture plantations to try to benefit from taxation minimisation schemes. This is something that the coalition also needs to look at very carefully in its climate change policies and to make sure that there is recognition that what we currently have in carbon sink forests legislation is totally flawed. It does not have biodiversity and it does not have permanence in its sights. It is just another one of these poorly thought-through schemes. So I indicate that, when we get to the committee stage, I will be looking at that and moving an amendment on it.

I also want to say that I think it demonstrates a complete lack of courtesy to the Senate for the government to have dropped in a whole swag of amendments three or four minutes before this debate. I did not see them until 25 past 12 today. I do not know whether the coalition had the opportunity of seeing and being briefed on the amendments that were dropped here just before this debate began; perhaps the coalition may wish to clarify whether they did have that opportunity. I did not and I am not prepared to proceed beyond the second reading stage until there has been the courtesy of a briefing to the various parties in this place as to what these amendments mean. I note that there appears to be a connection between managed investment schemes and managed investment trusts. I do not know what that means and I would appreciate some explanation. I note that page 19 of the Bills Digest says:

As the Explanatory Memorandum for the current Bill explains, a wholesale trust ‘is a MIS [Managed Investment Scheme] that has wholesale clients and is not required to be registered under the Corporations Act 2001’

I notice that, in one of the proposed amendments we have, ‘Proposed subdivision 275(a) extends the concept of managed investment trust to certain widely held trusts that do not otherwise meet the definition of a managed investment trust.’ I want to know whether, under some circumstances, managed investment schemes are regarded as managed investment trusts and what these amendments mean in terms of their treatment. It may be, as the minister has claimed, that this is just a technical amendment that has no significant meaning in the scheme of tax law. I am not an expert on tax law by any stretch of the imagination and do not pretend to be, but I would appreciate an explanation from the government as to the connection between the changes being proposed for managed investment trusts and managed investment schemes in terms of how the two operate and connect. If the government does want the Senate’s support for amendments, particularly in areas like tax law, which is hugely complicated, it has an obligation to circulate those amendments not with a couple of minutes to go before the debate.

To conclude, I am glad that ASIC currently has out a consultation paper regarding managed investment schemes. In my view, it is about time that ASIC took its responsibilities in relation to these schemes a little more seriously than it has in the past. When I wrote to ASIC about the fact that I regarded these managed investment schemes as no more than Ponzi schemes, I got a note back saying that it was beyond the capacity of ASIC to make judgments like that and that they had to look at the product disclosure briefs in their offerings to make sure that they adhered to certain regulatory disclosure, but no judgment could be made as to the veracity of those. In my view, that is misleading investors.

I am pretty disgusted all round with the way managed investment schemes have worked. For the life of me, I cannot understand why the government would continue with this structure of managed investment schemes when it is very clear that they have been a disaster in terms of forest policy, wood products and the price of agricultural land and now they are a disaster for a whole range of investors who went into them not because they were interested in wood products but because they were interested in minimising their tax. Once you separate the reason for the investment from the outcome, as occurs with managed investment schemes, you are setting up a disaster.

I would like to see the government get rid of managed investment schemes altogether. I think we are going to be cleaning up the mess from those schemes for a very long time to come, especially as they pertain to land use in rural and regional Australia, wood supply and the wood products industry around Australia—not to mention integrity. I am particularly keen to know from the tax commissioner the basis on which he has deemed, since 1998, for more than a decade, these managed investment schemes to be commercially viable. The community has a right to know why the tax office gave that tick of approval.