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Thursday, 17 September 2009
Page: 10008

Mr FORREST (10:21 AM) —I am pleased to have the opportunity to speak to the report on agribusiness managed investment schemes of the Joint Standing Committee on Corporations and Financial Services. Whilst I do not serve on the committee, I have taken an active interest over the years in the outcomes of managed investment schemes. It has been a very confusing story for me, from a constituency point of view, because there are those who support the capital outcomes of managed investment schemes and there are those who do not. In fact, down in my part of the world I have one municipality pitched against the other. But I formed the view five or six years ago that the majority were dead against the concept of managed investment schemes in non-forestry agriculture. I am certainly not going to criticise the current government. It was an issue of representation through the period of the previous government. In my railing against managed investment schemes, particularly their operation in horticulture, I was told that the tax commissioner needed to take the issue back to the court.

The history of managed investment schemes, particularly their function in non-forestry, started some time ago with the court ruling of one judge who deemed it appropriate that a non-participating investor in agriculture—remote—was entitled to upfront tax concessions. The outcome of that was horrendous for regions right across rural Australia. My conventional, for-profit horticulturalists—particularly in wine grapes—railed against the operation of managed investment schemes from Great Southern and Timbercorp. This was an industry with a commodity already in oversupply. That was the last nail in the coffin in view of my position on managed investment schemes.

I wrote to Senator Nick Sherry, the responsible minister, as Minister for Superannuation and Corporate Law, way back in April. I put on the Notice Paper questions to the Treasurer on 16 March. Then we saw the collapse of Timbercorp and following in suit Great Southern. Those circumstances were perfectly predictable. In my letter in April to Senator Sherry, I asked him to please instigate an inquiry. At that stage I asked for ASIC or even the Australian tax office to instigate inquiries. I was overjoyed when he agreed to instruct the Joint Committee on Corporations and Financial Services, chaired by Mr Ripoll, to investigate this issue. That encouraged all of those in my constituency who opposed managed investment schemes. It created for them the opportunity to have their say, and they did that overwhelmingly.

Having put in all of that effort, I am just a little bit disappointed in the report, because my position for at least the last five years has been that the legislation needs to be changed. I accept that there is a proposition and reasonable argument in agroforestry that if we want Australian investors to make an investment that they have to wait 30 years to redeem—and also to encourage them in the carbon sequestration challenge—then it may be appropriate to offer an upfront tax deduction for them to achieve that, given that they have to forsake the potential for income for so long a period. Even then, in the southern regions of my constituency, the advent of agroforestry MISs is still not popular, because then you have the concept of corporations coming in purchasing huge tracts of land—just gigantic chunks of land—for agroforestry. The impact of that on small rural communities is that more and more families leave, you lose the school and it is just another step in the collapse of the social infrastructure of regional areas. But I accept that as a concept. I am not comfortable with it, but I accept it.

But I cannot accept managed investment schemes driven only by investors who want tax deductions. My argument has always been that there needed to be significant changes in the Corporations Act. This report in recommendation 2 goes to that, but it does not go far enough. It is only recommending that:

That the government amend the Corporations Act to require ASIC to appoint a temporary Responsible Entity when a registered managed investment scheme becomes externally administered or a liquidator is appointed.

That is too far after the event. There needs to be more significant definitional changes in the Corporations Act. And, of course, the Income Tax Assessment Act needs to be changed significantly. I am a little bit disappointed that the committee has not had the courage to recognise the evidence received and deemed that such strong recommendations are necessary. Ultimately, both of those pieces of legislation will need to be changed.

One thing I am encouraged about, though, is that the committee has taken evidence and had it recorded just how complex these managed investment schemes are. They are unbelievably complex. The liquidators now at Timbercorp and Great Southern are at a loss to determine the proprietorial rights of people who have investments. It is just so complicated. Every step in the process is designed to instigate a tax-deductible outcome—even the capital investment on the properties themselves. For example, if it requires a huge packing shed, that is not necessarily owned by the entity that owns the land. There is a 99-year lease arrangement and some other investor makes an investment, builds those premises—the shed or whatever it is, even pumping stations—and receives rent for it. You can see the way it is all designed to maximise the tax-deductible outcome.

The real weakness, though, in the non-agroforestry area is that it is not driven by market outcomes. Certainly for managed investment schemes to be investing in citrus, wine grapes, table grapes—all commodities currently struggling—it is just not acceptable. In my letters to Senator Sherry I asked him to investigate such things as whether the financial projections of managed investment schemes were overzealous and overoptimistic in order to ensnare investors into making investments. I asked him also would he address the issue of the proprietary rights of unit holders in those circumstances. The evidence quite clearly confirms that it is completely uncertain. In Timbercorp, for instance, the rights of the investors in the water is notable. Timbercorp has become the largest water allocation licence holder in Victoria. They reached their cap two years ago. It represents huge volumes of water.

When I saw the capital being invested from an engineering perspective—huge pumping stations on the river to pump into what we refer to in engineering parlance as a turkey’s nest dam, an elevated storage, in sandy Mallee country, that increases the pressure and causes accessions to the groundwater—I was just alarmed that engineering design was not complying with prudent principles. Then there are water storages that cover up to 30 or 40 acres of storage in an evaporation zone of at least a metre a year—not good water conservation practice. It seemed to me that, with the capital made available by willing investors receiving tax deductions, there was no responsibility about the accountability principles, even as to the purchase of water.

My irrigators will never forgive this place for allowing the circumstances to be created such that those with an unlimited purse could move into the water market and pay up to $2,000 a megalitre—far beyond the capacity of my for-profit farming community to match. That has been a real sticking point and has left a very sour taste in the mouth of Murray Valley irrigators, particularly on the Victorian side of the river, who are going short of water, and who pay for a water allocation but do not necessarily receive it. In addition to that, they have to go into the water market to purchase water to save their vines, citrus trees, stone fruit trees or whatever the commodity is that they are producing in horticulture, and even their vegetables.

So I have to declare my position: I will not rest until the legislation is changed to completely ban the concept of a managed investment scheme driven by tax deductibility and not by market outcomes, export enhancement or even import replacement, at least. But the models that I have seen rolled out in my constituency and other nearby constituencies, particularly along the Murray Valley, just need to be stopped.

It is no surprise, the final demise of Timbercorp and Great Southern—no surprise at all. It was just a lot longer coming than I was predicting four or five years ago. But I have never forgotten—I was only newly-elected, in my second term; it would have been about the mid-nineties, probably 1996—publicly calling for a moratorium on the planting of wine grapes, since blind Freddy could see we were over-planting, and getting absolutely condemned: ‘Who is this idiot representing us in Canberra?’ But that is what has ultimately happened to the wine industry.

The move by Great Southern into their wine-grape operations in South Australia—in particular one very large wine-grape operation at Lake Cullulleraine in the north-west corner of my constituency—was the final death knell on any support they might receive. There is some ongoing support in the Swan Hill Rural City Council’s municipality, associated with the soldier-settlement district of Robinvale, where this massive investment has resulted in employment and the establishment of new businesses in pump maintenance and fertiliser, and agronomy and all of the other sciences that go into producing state-of-the-art agriculture—that is true, and I accept that. But I simply say to those constituents associated with Robinvale who have been urging me to do something about saving, in some way, Timbercorp or Great Southern, that I cannot and will not. I leave the liquidators to sort out the mess, the basket-case mess, of ownership in both those entities. If someone were to come to me with a model that said, ‘I want to have this kind of concept in place to promote a better outcome in agriculture, or to grow a product that has huge potential in an export market, or that is import-replacement focused,’ then I would consider it. But my experience over the years has been such that I am diametrically opposed.

I just wish this report went further in the strength of its recommendations. Despite that, I will continue making representations so that the legislation gets changed once and for all, to give my for-profit, slightly smaller—though some of them are corporate—operations of a family-owned nature some incentives, to show that this is a parliament that believes in them and believes they have a place in the nation’s prosperity from here on. They desperately need that signal at the moment.