Return of the rotten apples PHILIP WEN March 1, 2010
KAY Alex was sifting through her mail last month when she opened a seemingly innocuous envelope. ''I was devastated,'' Ms Alex said. ''It's caused me sleepless nights and days of anxiety. Even talking about it now I just feel really sick and upset.''
The letter, from HP Mercantile Pty Ltd, demanded repayment of $39,000, originating from an investment made more than a decade ago in Treetop Apples, an orchard managed by Tumut River Orchards Management.
It has been a rough start to the year for Ms Alex, whose husband is recovering from heart surgery. Her own health problems limit her to working three days a week.
''We were looking so positively towards 2010,'' she said. ''We've had so many setbacks and health issues and we were looking at a new start.''
Ms Alex is one of 2500 unsuspecting investors holding 6600 allotments in various Tumut River projects to have received letters from HP Mercantile. Some people were told they owed hundreds of thousands of dollars. Yet Tumut River went broke in 1998.
Founded in 1989 by Riverina local Andrew Purcell, Tumut River offered investors an opportunity to participate in growing stone fruits such as peaches, plums and nectarines, as well as grapes and apples.
But it was not just the prospect of producing high-quality fruit that lured growers. Tumut River unabashedly promoted its projects as tax-minimisation schemes; growers could obtain attractive up-front tax deductions by borrowing the full amount invested. The 1997 prospectus for Treetop Apples, for example, trumpeted a $40,000 tax deduction for each allotment of apple trees acquired, for an outlay of just $16,000. The loan would cover the gap, and would be paid off by profits made as the investments, well, bore fruit.
The tax breaks offered to Tumut River investors were neither new nor controversial. Agribusiness-managed investment schemes thrived in the 1990s, as a growing brigade of Pitt and Collins Street farmers got wind of a new way to trim their tax bills.
The caveat was that for a tax deduction to be allowed, the investments must have a genuine prospect of turning a profit. Any sniff that a scheme was no more than a sham to generate tax deductions, and the Tax Office would come down hard.
Accountant and former investor Barry Coates believed that Tumut River's projects had been severely mismanaged for years and the survival of existing projects soon became dependent on capital raised from subsequent projects.
''It was much like a Ponzi scheme, where the next scheme funded the one before it,'' Mr Coates said. ''There was something like $18 million of work that was never done.''
The company went into administration in 1998, unable to meet a $6 million tax liability.
To rub salt into the wound, having already lost their money, investors also had to repay tax deductions they had claimed.
''Tax concessions on rural investment were the flavour of the month,'' said investor Kevin Eadie. ''It was speculative. It certainly would have been safer to buy some BHP Billiton shares, but I went in with my eyes wide open.''
But less sophisticated investors, relying on advice from financial advisers, were left disgruntled by what they interpreted as an ATO backflip. One minute investors were told these were bona fide tax-efficient investments backed by the ATO, the next they were told they were shams and that they had to pay back every cent of tax.
''We were taken into the project on the promise that you were preparing for your retirement later on the produce from the orchards would pay for itself, and you would get the tax benefits,'' Ms Alex said.
History has a way of repeating itself. Timbercorp and Great Southern flourished as managers of agricultural investment schemes, offering lucrative up-front tax deductions in much the same way as Tumut River did. Having started in timber, the companies diversified to manage other non-forestry investments, including olives, almonds and vineyards.
But in 2007, the ATO issued a tax ruling seeking to revoke the tax deductibility of investments in certain non-forestry managed investment schemes. The ruling devastated the industry as shocked investors avoided the once-popular schemes, previously considered a cast-iron way to mitigate tax.
Several companies, including Great Southern and Timbercorp, launched a test case in the Federal Court in August 2008 to overturn the ruling. They won, but the damage had already been done.
''It created a great deal of uncertainty as to what may or may not have happened in the sector,'' said Australian Agribusiness Group managing director Marcus Elgin.
''It certainly hurt the sales programs of companies like Great Southern and Timbercorp. The uncertainty of not knowing what might happen dried up investment, hurt the share price and got their bankers severely worried.''
Source: The Age
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