Agribusiness collapses drive call for change

THE government's corporate advisory body has called for sweeping changes to the laws on agribusiness investment schemes, after a string of collapses in the sector left tens of thousands of investors out of pocket.

By InvestSMART · 7 Aug 2012

By InvestSMART ·
7 Aug 2012

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Under the plan, operators would be banned from using the legal structure employed by failed timber plantation groups Great Southern and Timbercorp.

Some $8 billion is held in managed investment schemes, which are commonly used in passive investments such as managed share funds.

However, there have been calls for changes after the collapses of forestry groups Great Southern and Timbercorp in 2009, which affected thousands of investors.

In a report out today, the Corporations and Markets Advisory Committee calls for a ban on new "common enterprise" schemes, where members play an "entrepreneurial" role for tax reasons.

With forestry schemes, for instance, investors could receive hefty tax deductions if they were able to show they were closely involved with the plantations.

But the committee, made up of independent corporate law experts, said this created a minefield of complexity when the schemes ultimately collapsed.

There was an "intermingling of the affairs and property of the scheme with that of its members", the report said, and this sparked confusion after the schemes had imploded.

"CAMAC considers that this intermingling problem could be avoided if only pooled investment schemes were permitted, where members act in a matter similar to shareholders in a company," it said.

The Australian Securities and Investments Commission has also said it will target managed investment schemes in agribusiness.

Earlier this year, ASIC said 138 agribusiness schemes worth more than $4 billion had collapsed since 2009, affecting 93,000 investors.

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Frequently Asked Questions about this Article…

What changes did the corporate advisory body (CAMAC) recommend for agribusiness investment schemes?

CAMAC recommended sweeping legal changes, including banning new "common enterprise" agribusiness schemes and permitting only pooled investment schemes where members act more like company shareholders to avoid the intermingling problems seen in failed forestry groups.

Which agribusiness structures or operators would be banned under the proposed rules?

Under the plan operators would be banned from using the legal structure employed by failed timber plantation groups such as Great Southern and Timbercorp — the kinds of structures that allowed members to claim an entrepreneurial role for tax reasons.

How big is the problem of agribusiness collapses and how many investors were affected?

ASIC reported that 138 agribusiness schemes worth more than $4 billion have collapsed since 2009, affecting about 93,000 investors. The article also notes roughly $8 billion is held in managed investment schemes generally.

What is a "common enterprise" agribusiness scheme and why is it a concern for investors?

A common enterprise scheme is one where investors are treated as playing an entrepreneurial role — often for tax advantages. CAMAC says this creates complexity and a dangerous intermingling of scheme and member affairs, which caused major confusion and losses when schemes collapsed.

How would pooled investment schemes differ from the forestry-style schemes that collapsed?

Pooled investment schemes treat members more like shareholders in a company, keeping scheme assets and member affairs separate. CAMAC argued this structure would reduce the intermingling problems that occurred with the failed forestry schemes.

What role did tax deductions play in forestry agribusiness schemes like those run by Great Southern and Timbercorp?

With forestry schemes investors could receive hefty tax deductions if they demonstrated close involvement with the plantations. That tax-driven 'entrepreneurial' positioning contributed to the complex structures CAMAC criticized.

Is the regulator taking action on managed investment schemes in agribusiness?

Yes. The Australian Securities and Investments Commission (ASIC) has said it will target managed investment schemes in agribusiness, reflecting increased regulatory focus after multiple scheme collapses.

What should everyday investors learn from the agribusiness collapses and CAMAC's recommendations?

Everyday investors should note that regulators and advisory bodies are calling for changes because forestry-style managed investment schemes created legal and tax complexity and large losses. The issues have prompted proposals to ban common enterprise structures and increased ASIC scrutiny of agribusiness MIS — factors investors may want to consider when evaluating such investments.