Damian O'Connor, Special Counsel
Michelle Eastwell, Senior Associate
In a recent test case the Federal Court has ruled that initial
and ongoing management fees, rent, operating costs and other fees
of investors in a registered agricultural managed investment scheme
are tax deductible. As a result of this decision, the Tax Office
has advised that it will withdraw its current income tax ruling and
draft GST ruling on registered agricultural managed investment
schemes and will issue a new income tax ruling this year.
Historically, the costs of an investment in a registered
agricultural managed investment scheme were deductible up front.
However, in October 2007, the ATO issued a tax ruling (TR 2007/08)
which confirmed that investments in registered agricultural managed
investment schemes which began on or after 1 July 2008 would be
considered a capital cost of the investment and would not be tax
deductible. This was contrary to the general position prior to 1
July 2008 where investors were usually entitled to a tax deduction,
as these costs were considered outgoings in operating a business.
As a result of amendments to the Income Tax Assessment Act 1997
(Cth), this tax ruling did not effect registered forestry managed
investment schemes in which investors are entitled to an up front
deduction for their investment if certain conditions are met.
As a result of TR 2007/08, the industry body, Agricultural
Investments Managers Australia, and the Commissioner of Taxation
jointly agreed to hold a test case in order to obtain some clarity
as to the deductibility of investments in registered non-forestry
agricultural managed investment schemes. The test case, Hance v
Commissioner of Taxation, was based on two private rulings which
related to a proposed almond managed investment scheme.
In a unanimous decision of the Federal Court, it was held that
the initial and ongoing contributions to the proposed almond
managed investment scheme would be incurred as operating expenses
in carrying on each investor's business and as such they would
be tax deductible. Pivotal to this decision was a determination as
to whether these contributions were outgoings incurred by each
individual investor in carrying on a business or whether they were
instead more appropriately characterised as capital contributions
made to acquire an income producing asset, being an interest in the
scheme and rights to share the net proceeds from the sale of pooled
almonds (as was the Commissioner's view). The Federal Court
held that on the facts of this case, each individual investor was
in fact carrying on a business and accordingly expenses incurred in
operating the business would be tax deductible.
Whilst each investment in a registered agricultural managed
investment scheme will need to be considered on its own facts, this
test case is important as it has broadened the scope for investors
to deduct fees payable under registered agricultural managed
investment schemes. It also indicates that the ATO is likely to
regard an investment made in a registered agricultural managed
investment scheme which is broadly similar to the test case, as tax
Schemes which feature non-recourse loans or indemnity
arrangements (which were not present in the test case) that may
reduce the exposure of scheme participants to commercial risk may
still attract the Commissioner's close attention.
The risks are not all confined to differences of opinion with
the Taxation Commissioner. In recent litigation, promoters of tax
effective schemes (or their associates) have sued participants
seeking to enforce terms of the arrangements that participants most
probably regarded as window dressing, if they understood them at
A recent High Court decision held that non-recourse/ indemnity
arrangements in an agricultural scheme could not be enforced by the
participants because they had not strictly observed the terms,
which required loan payments to be made on time. The worst result
in such a scenario may be an agricultural scheme that fails
commercially, loans from the promoters that must be repaid and the
prospect that the Tax Commissioner doesn't allow up front
deductions in any case.
The Federal Government is reviewing the economic impact of
non-forestry managed investment schemes (forestry schemes now have
separate tax legislation), including whether any adverse outcomes
from these arrangements (such as the diversion of resources from
other farmers) arise because of perceived unfair tax
It maybe that the current economic climate and the outcome of
the Government review will impact on how these arrangements operate
in the future, notwithstanding the favourable Federal Court
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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