BIG WIN FOR AGRICULTURAL INVESTMENT SCHEMES
Test case allows upfront deductions for investors Investments in almonds, olives and other agricultural Managed Investments Schemes (MIS) will be back in favour a recent test case decision.
Draft ruling to be withdrawn
Investors have been avoiding investments in agricultural MIS following the release by the Commissioner of Taxation of a draft ruling, which stated expenses incurred for these investments were not tax deductible. The Commissioner has said he will withdraw the draft ruling and follow the test case findings to allow upfront deductions for these types of investments.
However, care still needs to be taken because the Commissioner qualified this statement by saying he will only apply the test case finding to MIS arrangements that are broadly similar to the test case. He specifically indicated that arrangements that involve features like non-recourse finance or round robin funding would still have deductions disallowed.
Investors are carrying on business
An important part of the test case decision by the Federal Court was that the investors were carrying on business in their own right even though they delegated the manager to do all this farming business activity. The court rejected the Commissioner’s argument that the investors were passive investors and that it was the manager of the MIS that was carrying on the farming business.
The court compared the investors to the position of a silent partner which can also involve more or less total delegation of activity while still being seen as carrying on business.
The Federal Court also found that the fees and other expenses incurred by the investors were not inflated and were generally within commercial norms for the types of activities. It also held that the expenses were all incurred on revenue account.
The court also found the pooling of the produce by the investors should not detract from the fact that they were all carrying on their own business.
Many traditional farmers and their representatives have been critical of the test case as they see these agricultural MIS as taking away valuable land, water and other resources from the more traditional farming sectors. They have criticised the arrangements for being more to do with tax deductions for city investors than about genuine farming investments.
However, these concerns may not be well founded because the test case dealt with a commercial arrangement that did not involve the more creative tax features that attracted many investors to previous mass marked MIS arrangements (e.g. limited recourse financing). Without limited recourse finance the investors will be fully liable for any loans they take out for the investment, irrespective of whether they make a profit.
Prepared by: PKF Chartered Accountants & Business Advisors