'Common enterprise' schemes face axe

THE federal 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.

Around $48 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 in the provision of these schemes after the collapses of Great Southern and Timbercorp in 2009 affected thousands of small investors.

In a new report to be published today, the Corporations and Markets Advisory Committee calls for a ban on new "common enterprise" schemes, where members play a more "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 report also proposed giving small investors more rights in the event of a collapse, by allowing them a direct claim on the assets owned by the scheme. Under the existing laws, small investors face a complex process of applying for access to the assets through the responsible entity of the scheme.

The proposed shake-up follows extensive political scrutiny of agribusiness management investment schemes, with one 2009 parliamentary committee concluding the schemes had a "Ponzi-like character".

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 did the CAMAC report recommend for agribusiness investment schemes?

The Corporations and Markets Advisory Committee (CAMAC) recommended banning new "common enterprise" agribusiness schemes and allowing only pooled investment schemes. The report also proposed giving small investors stronger rights after a collapse, including a direct claim on scheme assets, and banning the legal structures used by failed groups such as Great Southern and Timbercorp.

What is a "common enterprise" scheme and how does it differ from a pooled investment scheme?

A common enterprise scheme is one where members play a more entrepreneurial role—often for tax reasons—so the affairs and property of the scheme can become intermingled with members’ own affairs. CAMAC says pooled investment schemes are preferable because members act more like shareholders, reducing that risky intermingling and legal complexity if the scheme collapses.

Why were Great Southern and Timbercorp singled out in the report?

The report said operators should be banned from using the legal structures employed by failed timber plantation groups Great Southern and Timbercorp, which collapsed in 2009 and left thousands of small investors out of pocket. Those collapses highlighted problems with the common enterprise structure and sparked calls for tighter rules.

How big is the managed investment scheme sector and how many agribusiness schemes have failed?

The article notes around $48 billion is held in managed investment schemes generally. ASIC has said 138 agribusiness schemes worth more than $4 billion have collapsed since 2009, affecting about 93,000 investors.

What investor protections did the report propose if a scheme collapses?

CAMAC proposed giving small investors more direct rights to the assets owned by a scheme, allowing them to claim assets directly rather than navigating the complex process of applying for access through the scheme’s responsible entity under current law.

How did tax incentives contribute to problems in forestry and agribusiness schemes?

The report highlights that forestry schemes sometimes offered hefty tax deductions if investors could show close involvement with the plantation, which encouraged an entrepreneurial membership role for tax reasons and contributed to legal and practical complexity when schemes failed.

What is ASIC doing about managed investment schemes in agribusiness?

The Australian Securities and Investments Commission (ASIC) has said it will target managed investment schemes in agribusiness, reflecting ongoing regulatory scrutiny after the collapses and the parliamentary committee’s finding that some schemes had a 'Ponzi-like character.'

What should everyday investors watch for when considering agribusiness managed investment schemes?

Based on the article, everyday investors should check the scheme structure (common enterprise versus pooled), understand any tax deductions being promoted, be aware of how investor rights would work if the scheme failed, and note that regulators like ASIC are targeting problem agribusiness schemes—all factors that affect risk and potential recovery.