Our Sleeping ?Watch Puppies'

It’s been a rich week for feedback. Our swing at the dodgier aspects of the rural managed investment schemes industry resulted in some weighty and very relevant research lobbing in the mail box, while the interview about a Shanghai real estate investment company elicited some interesting news from China. The Eureka Report net is wide.

First the MIS research. What is it about serious economic study that results in a title as boring as Economic effects of income-tax law on investments in Australian agriculture with particular reference to new and emerging industries?

The fine print adds that it’s a report for the Rural Industries Research & Development Corporation by Rick Lacey, Alistair Watson and John Crase, but what it really should be called is Why the Tax Office, ASIC and the Federal Government in general have missed the MIS boat. It’s available here.

It’s a considered and unemotional document, unlike the marketing guff poured out by the MIS sales force. It’s supportive of the idea of MIS, but effectively finds our “watch puppies” are failing investors and rural industry alike by not taking a more rigorous approach to transparency. (The study does not say that meddling politicians, compromised by industry lobbying and donations, should carry much of the blame, but I will.)

The RIRDC study throws up some small gems while pursuing its broader target of a more economically rational approach to rural tax breaks. Early in the executive summary there’s the apparently innocuous observation that:

Managed Investment Schemes (MIS) have been a high-profile source of investment in rural industries. In recent years, these are believed to have accounted for around $300 million per annum of investment in rural industries.

The catch here is that managed investment schemes have been capturing $1 billion and more from investors '” underlying how little of the punters’ money actually ends up going into agriculture.

The authors like the way the schemes can spread risk over a large number of investors and, through the tax deductibility of losses, share the risks between investors and the state. It encourages more investment in higher-risk areas, but on the downside:

Along with other studies, our analysis suggests that the MIS sector (but not all MIS) continues to perform poorly with respect to realistic or actual rates of return versus projected rates. There are limited rights for investors. Issues arising from the large number and small economic size of the retail investor population, and those arising from asymmetric information, dominate the economics of MIS.

In simple English, the promoters are doing very nicely, the punters are not. The authors would like to see that redressed by the tax office and ASIC making more information available to investors on the performance of the schemes and advisers '” information they suggest the tax office already collects.

What they’d like to see from ASIC is for it to be proactive in the assessment of prospectuses, instead of just registering the things and occasionally mumbling about the quality of investor advice. They suggest ASIC could commission independent project reviews, recouping the cost from the promoters as part of prospectus process.

Having long since run away from actually checking the content of prospectuses as being simply too large and difficult a job, ASIC would be loath to re-enter this territory. And as for some genuine, imaginative tax reform '” nah, there are too many vested interests making fortunes out of the present setup to rock that boat.

Meanwhile the Chinese Government can sometimes be more willing to change rules when it suits '” perhaps a benefit of not having democracy to worry about. Hot on the heels of the Shanghai real estate story, a Beijing source forwarded a report from China Business News. The report warns that the Government is about to limit the ability of foreigners and Hong Kong, Macau and Taiwan residents to buy mainland housing in a bid “to curb the speculation in the over-heated property market”.

The paper says non-citizens would have to obtain prior approval to buy mainland property, there would be a limit of one or two residential properties and resale would be forbidden for an unspecified period. Compared with the pace of financial and taxation changes, the real estate administrative regulation “will be effective almost instantaneous”.

It’s not just the Reserve Bank of Australia that can use a blunt instrument to curtail property speculation.