Investors are about to find that tax dodges are a risky business.

The Age - 18th Jun 2009 - Ian Verrender

Investors are about to find that tax dodges are a risky business.

FORGET women and scorn, hell hath no fury like a taxman bilked. And those who invested in the failed tax-effective schemes run by Timbercorp and Great Southern are about to feel the heat.

Many already have faced a double whammy the total loss from their shares in the failed companies and a huge hit on their investments in the investment schemes run by the companies that produce everything from timber to tomatoes.

But few have factored in the tax implications of the collapse and, unbeknown to most, they now face massive potential penalties from the Australian Tax Office.

The deductions they received in the past few years may have to be repaid because it has now emerged - through investigations by administrators and receivers - that these hopelessly insolvent schemes were based on unrealistic forecasts.

Therein lies the problem.

Most were not commercially viable.

But that isn't the end of it. In addition to the repayment, a 100 per cent penalty is not out of the question.

Add to that compound interest over the years since the deduction was claimed and you have the potential for a world of pain for the 62,000 investors who have attempted to minimise their tax obligations.

Investors - many of them businessmen who run their own superannuation funds - are likely to argue they invested in these schemes in good faith. That may not be enough. The Tax Office stipulates that it is the responsibility of investors to ensure these schemes comply with the spirit and letter of the law at all time while they are investors.

The ATO has been on a crusade against tax-driven rural investment schemes for decades.

Despite repeated action against promoters of everything from radiata pine to jojoba beans in the 1970s and 1980s, more than $10 billion has been invested in the schemes since the late 1990s.

In 2000, the ATO secured a major victory in the Federal Court when it clawed back $50 million in tax deductions from investors who had plunged into tea tree ventures on the far north coast of NSW in the previous four years.

All the deductions were ruled invalid. Fortunately for those who invested earlier, a six-year statute of limitations prevented the ATO from reclaiming far more.

Mainstar One, a company run by a financial world fringe dweller Glen Stotter - a man described by a federal court judge as "misleading and deceptive" - had raised more than $700 million on tax driven schemes in the previous decade.

The tax breaks on rural investment originally were designed to encourage legitimate rural producers - the bulk of whom are asset-rich and cash-poor - to invest in agriculture.

But the breaks gave rise to a new breed of agricultural enthusiasts: Pitt Street and Collins Street farmers who cared less about the land and more about securing a tax break.

They embraced the tax incentives with such fervour that it became one of the biggest rorts since the "bottom of the harbour" schemes.

Rural investment became completely skewed. Land prices soared, an oversupply of various exotic commodities ensued and legitimate farmers were forced off the land.

In recent years, the promoters honed the marketing spiel to trumpet the environmental benefits in combating greenhouse gas emissions, a line that was swallowed hook, line and sinker in Canberra by politicians of all persuasions.

But there was no getting around the fact they were a tax rort.

That became blindingly apparent in 2007 when the Tax Office moved to outlaw the tax breaks on everything but the timber projects.

Although the decision later was overturned in the Federal Court, the damage was done and firms like Timbercorp and Great Southern were doomed.

Sales plummeted and the Ponzi schemes these things were became exposed.

There simply wasn't enough money coming in the door in new schemes to pay out those who had invested in maturing schemes.

Both companies relied on pulling fees from the amount invested in the schemes - not in the profitable operation of the schemes.

It has emerged that both companies signed up accountants - few of whom would have had a securities dealer's licence - across the country to help them market the schemes, offering fat commissions.

But there is always a winner. In this case, the accountants' loss will be the lawyers' gain.