The collapse of Timbercorp and now Great Southern is at least partly the consequence of the Howard Government’s attempts to regain control of agricultural managed investment schemes. The issue caused enormous ructions within the Coalition in 2006 and 2007, with the National Party and Bill Heffernan gunning for a taxation framework they claimed was damaging rural communities. The Greens, too, have long criticised MISs.
But it pays to be careful when you hear the Nationals complaining about rorts.
There’s plenty of credit/blame to go around for the development of the forest and non-forest plantation industries. The Keating Government took on the target of expanding Australia’s plantation timber industry by 300%, a vision that the Howard Government adopted with enthusiasm, based on a perception that worldwide demand for timber was going to massively increase. But changes to tax rules encouraged the proliferation of non-forest plantations and lured in investors looking for an easy upfront tax deduction.
In December 2006, with the Nationals and some rural Liberals on the warpath over the impact of the schemes, the Howard Government decided timber plantation schemes would retain upfront deductions if 70 per cent of costs were for actually planting trees. Two months later, Revenue Minister Peter Dutton announced that the ATO would remove deductions for non-timber plantation schemes from 1 July. Former Forestry Minister Wilson Tuckey, who is a big supporter of MISs, was furious, as was the MIS industry, which since 2000 had assembled a small army of financial advisers paid commissions and “authorised” to steer clients into MISs. Big lobbyists like Gavin Anderson were employed, unsuccessfully, to overturn the decision, a task eventually performed by the Federal Court last December.
The essence of the argument from the Nats, the National Farmers’ Federation and others like Heffernan was that plantations were a threat to rural life economically. They forced up land prices and water prices, they relied on new investors looking for deductions rather than trying to generate legitimate returns, they prevented other agricultural businesses from expanding, there was a lack of transparency in the performance of the schemes, and plantation operation was highly efficient, requiring few employees to manage areas previously farmed by several families.
MISs aren’t particularly defensible, but the case against them should be about the distortionary consequences of tax policy (in this case, highly expensive tax policy; Angus Grigg in the AFR today suggests $4.7b in tax breaks since 2000) and the unsustainability of a business built on clients looking for tax deductions. Businesses outside the agricultural sector have to compete with other businesses for resources all the time; many urban businesses would be only too happy to have access to inputs like land without the inconvenience of other firms bidding the price up.
You might also wonder why the likes of Heffernan and the Nationals aren’t clamouring for an end to another policy with similar impacts on rural communities: drought relief.
The Productivity Commission last week released a report requested by Chris Bowen last June on reforms to drought assistance. The PC found that most farmers did not need to call on Exceptional Circumstances payments even during the recent, severe drought, and those that didn’t earned greater income and were more diversified than the 23% who did need drought relief, even if they were in the same areas. The PC also found a lack of transparency in the Commonwealth’s process of declaring areas facing Exceptional Circumstances, and found that the EC scheme was divisive within rural communities, and that the payments do not encourage more sustainable agricultural practices by recipients. Drought assistance was also distortionary compared to other forms of income and business support in the community, some farmers used creative accounting to take advantage of it, and it increases the cost of expansion by other, more resilient and successful farmers.
Opaque, distortionary, divisive, driven by accounting, and driving up prices for other rural businesses – is this drought relief or an MIS we’re talking about?
The PC does not propose to end drought relief – but to get rid of the Exceptional Circumstances system gradually and replace it with a support scheme that encourages greater self-sufficiency and better meshes with existing income and business support arrangements.
The National Farmers’ Federation in a submission to the PC, thought that EC was no longer appropriate and that drought relief should transition to a more integrated approach centred on research, education and training, risk and water management and better support for the principle of self-reliance.
But rather than take a similar approach to that adopted on MISs, the Coalition’s agriculture spokesman John Cobb called the PC Report “the most heartless, most bloody-minded report I’ve ever seen come out of a Government department in all my life being involved in representing farmers.”
It appears the Nats don’t mind a rural rort, as long as it is going to their constituents.