Navigation: Previous Page | Contents
Appendix 2
Witnesses who gave evidence at the public hearing
Canberra, 15 July 2009
ATO
Mr Bruce Quigley, Second Commissioner of Taxation
Ms Stephanie Martin, Deputy Commissioner of Taxation
Mr Des Maloney, Deputy Chief Tax Counsel
Treasury
Mr Paul McCullough, Acting Executive Director, Revenue
Group.
Mr Geoff Miller, General Manager, Corporations and Financial
Services Division
ICAA
Mr Hugh Elvy, Head of Financial Planning and Superannuation
Mr Jonathan Forrest, Member
CPA Australia
Mr Paul Drum, General Manager Policy and Research
Financial Planning Association
Ms Jo-Anne Bloch, CEO
Mr David Haintz, Director
Mr Rod Davies (Private capacity)
Dr David McKenzie (Private capacity)
A3P and NAFI
Mr Alan Cummine, Manager Plantation Investment, A3P
Mr Alan Hansard, CEO National Association of Forest
Industries
Mr Richard Stanton, CEO Australian Plantation Products and
Paper Industry Council
Plantall Forestry Consultants
Mr David Wettenhall
Macquarie Agricultural Funds Management
Mr Anthony Abraham, CEO
Horticulture Australia
Mr Stuart Swaddling, Chair
Ms Kris Newton, CEO
ASIC
Mr Tony D'Aloisio, Chairman
Mr Greg Medcraft, Commissioner
Dr Pamela Hanrahan, Senior Executive Leader - Investment
Managers
Answers to Questions on Notice
1. ASIC
ASIC 1 – Hansard p. 112
CHAIR—Have you had any concerns
in the past where there have been directors who have actually resigned from
either the responsible entities or the boards because they had concerns that
there was no independence, that they were not meeting their obligations and
they found no other mechanism to deal with those issues bar resigning? Have you
heard of or read of or are you aware of something like that?
Mr D’Aloisio—We would need to
check that. Certainly none come to my mind. I could ask my team to look at that
and give you a more specific answer.
CHAIR—I am referring specifically
to the two that have collapsed, Great Southern and Timbercorp.
ASIC 2 – Hansard pp. 112-113
Senator BOYCE—Regarding section
I, where you mentioned the promotional material and what you have done,
particularly in relation to PBSs, I was having some difficulty working out ‘and
then what happens?’, looking for instance at 115(c), (d) and (e). Does ASIC attribute
motive to these failures?
Mr D’Aloisio—What would typically
happen is that if, for example, there was a misleading statement in something
we would clearly speak to the entity first and assess that. Let us assume we
concluded that it was misleading. Then, either the entity itself would correct
it then and there without a stop order or alternatively we would issue a stop
order and it would be corrected and then the stop order would cease to apply.
We would need to look at the specific cases, but generally these are ways of
getting things fixed so that fundraising and so on can continue on a better and
informed basis.
Senator BOYCE—What I am not
picking up there is whether we are talking about entities or organisations with
a history of needing to be ‘picked up’, so to speak, or whether we are talking
about quite isolated incidents.
Mr D’Aloisio—It would depend. We
can look at those numbers in more detail for you and give you a more specific
answer and look at the five matters and the three matters that are listed
there.
Answer ASIC 1 – Hansard p. 112
ASIC records do not indicate
that, prior to the appointment of external administrators, any directors of
Great Southern or Timbercorp raised concerns with us over independence issues
where they found no other mechanism to deal with those issues bar resigning.
We are aware of media articles
suggesting 2 directors former directors of Great Southern Managers Australia
Limited had resigned due to concerns over conflicts of interests (and other
issues) they were concerned about.
For example, we note the
following media articles which raise these concerns:
-
How timber chief
cashed in his chips, Australian Financial Review, Angus Grigg and Cameron
Rhodes, 10 June 2009; and
-
Auditors mislead
in Great Southern scandal, Australian Financial Review, Angus Grigg and Andrew
Burrell, 2 July 2009.
Answer: ASIC 2 – Hansard pp. 112-113
When ASIC conducts a surveillance
activity, the issues and outcomes of those activities are recorded in databases
which is relied upon by compliance staff and management to identify future work
that may be necessary to continue to improve the relevant sector that that
entity is in. For example, through analysis of our databases we may be able to
ascertain that a particular group of financial service providers is
over-represented in terms of the work we do. That over-representation may lead
us to develop specific compliance programmes to address the on-going issues we
are seeing. An example of this was a series of concerns raised in the mortgage
funds sector led ASIC, in September 2008, to require operators of mortgage
funds to provide enhanced disclosure when selling their products.
In terms of the 67 surveillance
activities we have conducted over the past 3 years in the agribusiness MIS
market, the distribution of entities is as follows:
-
We conducted one
surveillance on 31 entities;
-
We conducted two
surveillances on 12 entities (24 surveillance activities); and
-
We conducted
three surveillances on 4 entities (12 surveillance activities).
The information above suggests
there was a degree of repetition with some entities in the agribusiness MIS
sector, however a majority of actives were isolated. Where we have conducted
more than one surveillance on an entity, it is more a case that we conducted
ongoing monitoring of that entity following an initial concern being acted
upon. For example, on several occasions because we had identified disclosure
issuers with an agribusiness MIS PDS in one year, we conducted a review of that
entity's PDS in the following year automatically. That second review generated
a separate surveillance activity.
2. ATO
Topic: How many MIS product rulings has
the ATO produced?
Hansard Page: CFS 13-14
Question:
Mr
ROBERT—How many
MIS product rulings has the ATO produced?
Ms
Martin—In the
last year—
Mr
ROBERT—No, since
you started product ruling.
Ms
Martin—I do not
have the total figure. I can get it for you.
Mr ROBERT—Can you also, when you come back
on notice, tell us for each of the product rulings how long it took between
when the product ruling was requested and when the ATO actually publicly
released it. If there have been 20 product rulings, how long was it from
request to when it was released? You might want to provide some comment, for
example there might have been some back and forwarding between the person who
requested it and therefore the delay might have been caused by the requestor.
Mr
Quigley—Is that
for each product ruling?
Mr ROBERT—For each MIS product ruling.
Answer:
(a) How
many MIS Product Rulings has the ATO produced?
As explained in the ATO’s
submission to the Committee, product rulings were introduced by the ATO in 1998
to provide certainty about the taxation consequences of participating in a
particular scheme. The ATO has issued 1,351 product rulings from 23 September
1998 to 30 June 2009, of which 1,055 were in relation to the agribusiness
industry, across the following categories:
Category |
Product Rulings |
Horticulture |
546 |
Forestry |
509 |
Film |
56 |
Finance |
132 |
Non Commercial Losses |
108 |
Total |
1,351 |
There are several factors that
need to be considered when comparing the number of product rulings issued by
the ATO with the number of managed investment scheme (MIS) arrangements offered
in the market place. For example:
-
The relevant provisions in the Corporations
Act 2001 relating to product disclosure statements for managed investment
schemes require a statement about the taxation consequences of the relevant
arrangement. However, this does not require that this statement be based upon
a Product Ruling, although many entities do apply for a product ruling to meet
this requirement.
-
Prior to 2002 participants
entered into schemes through a prospectus which had a 13 month life. The Corporations
Act 2001 was amended by the Financial Services Reform Act 2001 which
introduced product disclosure statements from 11 March 2002 that have an
unlimited life. MIS managers then designed schemes that accepted participants
in more than one year and provided for a variety of classes of participant. The
ATO then commenced issuing product rulings for each year and for each class of
participant covered by the product disclosure statement. Since 1 July 2003 the
ATO has published 526 product rulings for 279 agribusiness (forestry and
horticulture) MIS; and
-
To deal with previously issued
product ruling arrangements covered by the non-commercial loss provisions
applying from 1 July 2000, the Tax Office issued a number of product rulings in
2002 and 2003. These product rulings exercised the Commissioner’s discretion
to not defer losses for MIS participants where there was an objective
expectation that the scheme would produce taxable income within a period that
was commercially viable for the industry concerned.
(b) How
long does it take the ATO to consider and issue a product ruling after an
application is received?
In the 2009 financial year;
-
65 per cent of product rulings,
being 30 of the 46 that issued, were considered and issued within 90 days from
when sufficient information was provided for the Tax Office to consider; and
-
on average 24 per cent of the
product ruling case time was in relation to the ATO waiting for further
information from the applicant.
The average time for the year
ended 30 June 2009 from when sufficient information for the Tax Office to
consider an agribusiness MIS application and a ruling being issued was 73 days.
Approximately one week of this timeframe is taken for the publication and
gazettal process for each product ruling.
The following graph shows the
distribution of time taken to issue all agribusiness product rulings during the
period 23 September 1998 to 30 June 2009 from the date they came into the
office with sufficient information for the ATO to proceed with the application.
The information does not include finance, film or non commercial loss product
rulings.
Distribution of time taken (days) to issue Agribusiness product
rulings.
The diagram below
provides the length of time taken to issue each of the agribusiness related
product rulings.
![](/~/media/wopapub/senate/committee/corporations_ctte/completed_inquiries/2008_10/MIS/report/e02_1_gif.ashx) ![](/~/media/wopapub/senate/committee/corporations_ctte/completed_inquiries/2008_10/MIS/report/e02_2_gif.ashx)
Delays in the issue of Product Rulings
may be caused by a number of factors, including;
-
the submission of additional or
updated material by the applicant. Applicants sometimes make changes to the
draft product disclosure document and supporting agreements during the
application process, such as to offer finance to the growers or change the
contractual arrangements;
-
applicants taking a significant
period of time to respond to ATO requests for additional clarifying
information. This may also lead to the applicant making subsequent changes to
the arrangement, the underlying agreements or fee structure; and
-
the presence of complex technical
issues that may not have a precedent and which require detailed analysis by the
ATO.
Topic: Cost
to the tax system of managed investment schemes
Hansard Page: CFS 19-20
Question:
CHAIR—Unless you have got this data at
hand, you can take this question on notice. Can you get back to the committee
with a percentage or a number as to the return to the tax system from MI
schemes in comparison to the deductions, the cost to the tax system, of MI
schemes.
Ms
Martin—I am not
sure we will have that data. It is only under the forestry measures that we can
identify the actual deductions claimed. That is only in relation to the new
forestry measures in division 394. Similarly, when the income is returned it is
not always singled out separately. So I will check, but I suspect that we will
not be able to give you that specific answer.
CHAIR—Could you not only check but
also have a look at the system in terms of making that determination. I am not
making a judgment on the tax treatment, I am just making the point that there
is a cost to the tax system and, therefore, the taxpayer in these schemes. And
there would be an expectation of a return in the future through the growth,
viability and returns that are expected of these schemes and the tax that is
paid by the RE. I would like any information, any data, any quantification of
that ratio and any other information around that. I am particularly interested
in how that might work. I would like to see either historical data or data on your
expectations for the future.
Answer:
A check of ATO systems confirms
that there is no basis upon which to determine the amount of deductions claimed
by participants in agribusiness managed investment schemes (MIS), or the income
flows resulting from such investments. This is because deductions claimed for
expenditure in MIS and income derived from these schemes are recorded in income
tax returns as part of the normal business activities of the participant
taxpayers (who are each running their own small business according to the case
law) and cannot be segregated from other non-MIS small businesses.
Topic: Discretion
in relation to ‘long tail arrangements’
Hansard Page: CFS 20-21
Question:
Mr
Maloney—There is
another discretion in relation to what I will call ‘long-tail arrangements’—for
example, a hardwood forestry plantation. If you make an investment now, it is
going to be many years before that investment returns assessable income, so the
income test will not be satisfied. But where the commissioner thinks it is
reasonable that, because of the particular kind of arrangement that has been
entered into, there will be income in the future, but it does not satisfy the
test this year, he can exercise a discretion as well.
Mr
Quigley—I think
we have given a ruling on that.
Mr
Maloney—We have
got a ruling.
CHAIR—Can those provisions be abused in any particular way by the scheme
itself or by the RE? Is there a way for that to be manipulated? I am
particularly interested in two things. Again, maybe you can take it on notice
and come back to us. One is whether it is either used or abused by the RE or
the scheme managers in any particular way to create losses. The other might be
whether the scheme is ever commercially viable. If that is not the case then the
non-loss provisions become part of the scheme itself rather than in the event
of, as you say, a drought, a flood or some other mitigating circumstances.
Mr Maloney—I think the essence of your
question really goes to when is the commissioner satisfied that his discretion
ought to be exercised. In relation to agribusinesses, we take advice from
industry experts in relation to the expectations that are put to us about
income derivation over time.
CHAIR—Maybe you
could just take that question on notice about the commercial viability in terms
of any losses, with a bit more information about how the ATO actually treats
that particular area. That would be helpful.
Mr Maloney—Sure.
Answers:
For agribusiness managed
investment schemes (MIS), the Tax Office usually considers the operation of the
non-commercial loss provisions in the income tax law as part of its
consideration of each application for product ruling made by Responsible
Entities (REs). Applicants request the Commissioner to exercise a discretion
in the provisions which in effect allows the losses to be claimed from the
first year rather than be deferred until net profit is derived in a later
year. The Commissioner has the discretion to allow these losses to be claimed
if a net profit is objectively expected within a commercially viable period,
which is
“... based on evidence from independent sources (where available)
that, within a period that is commercially viable for the industry concerned,
the activity will ... produce assessable income for an income year greater than
the deductions attributable to it for that year ...” (subparagraph
35-55(1)(b)(ii) Income Tax Assessment Act 1997)
In considering whether to
exercise the discretion, the Tax Office takes into account estimated cashflows
over the life of the project provided by the RE and requests reports by
industry experts about what would be an appropriate period for such a project
for the relevant produce in the particular geographic area (based upon industry
expertise and comparison with other businesses producing similar produce). The
Tax Office has issued two Taxation Rulings on the operation of the
non-commercial business loss regime, including its application in the context of
agribusiness MIS (Taxation Rulings TR2001/4 and TR 2007/6).
The Tax Office has identified
some instances where the subsequent implementation of the project has failed to
achieve a net profit for investors in the year when the exercise of the
Commissioner’s discretion expires (for example, in year six when the
Commissioner has granted a five year period for the discretion). Where this
has occurred, the Tax Office has advised the RE and the investors that the
subsequent year deductions for the losses will be deferred until the project
produces net assessable income.
Other arrangements have also been
identified by the Tax Office which involve the potential creation of losses for
consolidated groups of entities containing the RE. There may also be related
tax risks for investors in either the MIS project or associated land trusts.
The Tax Office issued a Taxpayer Alert (TA 2008/11) on such an arrangement on 6
June 2008 and is following up with appropriate compliance action.
3. CPA
and ICAA
Question on notice: "What percentage of the
accounting profession is either not a member of CPAs or not a member of
Chartered Accountants?'"
We refer to the question on notice above, and now
provide the following joint response on behalf our respective organisations. Determining
the size of the accounting industry, the number of individuals who refer to
themselves as accountants and the market share of the respective professional
accounting bodies – in particular CPA Australia and the Institute of Chartered
Accountants in Australia (the Institute) - is not readily determinable as the
term ~accountant"
is widely used.
However, the following provides the Committee with an indication via the
current available data.
A. The accounting profession, and Australian members
The Institute and CPA Australia view the accounting
profession as comprising those individuals who are appropriately qualified and
have been admitted by way of membership of one of the professional accounting organisations.
These professional organisations include the Institute and CPA Australia. In
this regard, we distinguish the accounting profession as the leading
component of the broader and larger generic category of accountants.
As advised on 15 July 2009, our members work in a
diverse range of fields including:
The
current Australian memberships of the Institute and CPA Australia are as
follows:
the
Institute of Chartered Accountants in Australia |
50,000 |
CPA
Australia |
85,0002 |
Also as
discussed during the Inquiry on 15 July 2009, while the term accountant is not
a regulated term in Australian law, and there are a large numbers of
individuals who refer to themselves as accountants this does not mean that
accountants are by and large unregulated. For example, accountants are.
depending on their field of practice. subject to a wide range of legislative
regulation. for example:
Further,
professional members of the InstiMe and CPA Australia are also subject to
professional and ethical standards issued by the APES Board as well as their
respective organisation's by-laws.
B.
Data available regarding numbers of accountants In Australia
There
are a number of statistical sources that can provide an indication of the
market and market share. For example according to Joboutlook.gov.au3, there
were 157,000 accountants in Australia in August 2008. This category only includes:
Accountant, Management Accountant and Taxation Accountant.
Conversely,
according to the most recent Australian Bureau of Statistics (ABS) data4 there
are 123,214 people who described themselves as accountants. However ABS also
has other similar categories. for example accountants, auditors and corporate
treasurers (536), accounting clerks (90,534), auditors (9547), branch
accountants
and managers (13,967), company secretaries (974), and corporate treasurers
(2029) amongst others. In total these add up to 240,810. We expect that many of
these would not call themselves accountants. However many would be viewed
generically as accountants in the market.
As can
be seen from the data provided above and depending on how it is categorised and
interpreted it can result in different outcomes, and therefore it is indicative
only.
C.
Determining market share
As
previously stated determining market share for accountants in Australia between
the professional accounting organisations is not readily determinable. For
example, the Institute and CPA Australia have members who have membership of
both professional bodies. Accordingly adding the total membership of the Institute
and CPA Australia would overstate the number of professional accountants and
overstate the market share when compared to the ABS data.
Notwithstanding
the above comments and observations, membership of the two professional bodies
do make up a significant and important segment of the accounting industry.
D. Summary
The data provided above
provides an outline of both the number of the Institute and CPA Australia
members, and the number of those who as per the ABS data who may consider
themselves to be accountants. Based on this data and other data available it is
not possible to provide a more definitive answer to the Joint Committee's
question.
We trust this information
is of use to the Joint Committee, and if the Joint Committee has any further
queries please advise.
4. FPA
FPA
Submission and evidence concerning Agribusiness Managed Investment Schemes
Further to
the FPA’s appearance at the PJC Hearing on Wednesday 15 July 2009 and to your
message of 23 July, I wish to provide the following additional information
arising in response to the Committee’s questions to the FPA.
Number
of authorised representatives involved in promoting either Great Southern or
Timbercorp
Our
understanding is that there were 380 individuals identified by ASIC that
operated directly as authorised representatives of Great Southern. We have been
able to confirm that three (3) were FPA members. In addition, there were
Australian Financial Services Licensees who had their own authorised
representatives that were recommending agribusiness MIS. This number is much
harder to quantify because of the broad number of AFSLs, and authorised
representatives, operating in Australia. We are not sure of the relevant number
that were authorised by Timbercorp.
Results
of FPA investigations into members’ exposure to Great Southern
Mr Robert
asked if we would be prepared to provide the results of FPA investigations into
the exposure of FPA members that are corporate bodies, known as FPA principal
members. This information was contained in the copy of the survey attached to
my previous letter dated 20 July and is provided again for convenience as an
attachment to this letter.
FPA survey of Principal Members
The FPA conducted a survey of its
Principal Members between 21 and 25 April 2009. Details of the survey and
results are contained in the attached report.
Complaints concerning Agribusiness
financial advice
In the course of the FPA’s oral
testimony before the committee I was asked about the number of complaints the
FPA has received about Agribusiness advice. I wish to inform the Committee that
we have in fact received one (1) complaint concerning Agribusiness.
The matter is in the inquiry
phase of our Professional Accountability Process. Our initial inquiries
indicate whilst the consumer concerned was a financial planning client of our
member, he received advice and recommendations to invest in Great Southern
investment projects from a different firm of accountants whose principals were
authorised representatives of Great Southern Securities Limited. Nevertheless, until
the process is complete we treat this as a complaint against the member, and I
wish to formally correct the record.
5. Macquarie
Macquarie
1 Hansard p. 97
Mr
Abraham-In Macquarie Agricultural Funds Management our independent forester
provides us with an annual assessment on what is happening. They review the
practices and they report to the board. That is independent of forestry
or indeed of us, who manage the business.
Senator
BOYCE-So they report straight to the board. Do you publish their reports?
Mr
Abraham-We put out a summary of their report. I think we put their report on our
website. If you like, I can confirm that for you. We generally make things like that
available to our investors.
Response
- Macquarie Agricultural Funds Management
Macquarie
engages an expert forester to conduct an annual assessment of the silvicultural
performance of each of the Macquarie Forestry Investment plantations.
Macquarie provides its investors with a
summary of the key findings from the expert forester report
in its annual agribusiness newsletter which is sent to investors and made available
via the Macquarie agribusiness website. The full copy of the report is used
primarily for internal management purposes and is not provided to investors.
In addition, Macquarie engages an
expert forester to conduct an annual review to assess the performance of each
of its forestry plantation managers in each of the regions in which the
Macquarie Forestry Investments operate. Expert foresters are also engaged to
provide a quarterly report to the Boards of the Responsible Entities regarding
plantation performance and any relevant issues affecting the plantations. This
is done on a quarterly basis to ensure the Boards have oversight over the
plantation operations. These quarterly board updates are for internal management
purposes and are not published to investors.
6. Treasury
Question:
Treasury 1
Topic: The
‘70 per cent rule’ for forestry MIS
Senator Boyce asked: Has the 70
per cent total expenditure figure gone now or does it still exist? Why is it 70
per cent?
Answer:
Division 394 of the Income Tax
Assessment Act 1997 provides for investors in forestry managed investment
schemes to receive a tax deduction equal to 100 per cent of their
contributions, provided that there is a reasonable expectation that at least
70 per cent of the scheme manager's expenditure under the scheme,
calculated at arm's length prices, is expenditure attributable to establishing
tending and felling trees for harvest (Direct Forestry Expenditure or DFE).
The 70 per cent requirement is
designed to ensure that most of the funds contributed by investors are spent on
activities directly related to establishing, tending and felling trees for
harvesting.
Question:
Treasury 2
Topic: Secrecy
and disclosure provisions in the tax law
Senator Farrell asked: Is there
any need to incorporate new exceptions into the tax laws to allow for greater
cooperation in matters that are only of a civil nature?
Answer:
The Review of Taxation Secrecy
and Disclosure Provisions (the Review) was first announced in August 2006.
While its principal goal was to consider the possibility of consolidating, into
a single framework, taxation secrecy and disclosure provisions currently found
across numerous taxation Acts, it has also considered the need to introduce new
disclosure provisions where the public interest in disclosure outweighs the
impact on taxpayer privacy.
One such new disclosure is
reflected in the exposure draft Tax Laws Amendment (Confidentiality Taxpayer
Information) Bill 2009 (the Bill) released for public consultation in March
of this year. Of relevance, the Bill proposes to remove restrictions on the
Australian Taxation Office’s (ATO) ability to provide taxpayer information to
the Australian Securities and Investments Commission (ASIC).
Under the existing taxation law,
taxpayer information can be provided to ASIC to enable it to perform its law
enforcement function but only where it relates to an indictable offence. Under
the proposed new framework, ASIC would be able to obtain taxpayer information
to fulfil its broader law enforcement role – that is, in relation to all
criminal offences and all provisions that ASIC administers that impose a
pecuniary penalty.
In the course of the Review, no
concerns have been raised regarding the limitations that taxation secrecy
provisions impose on the ability of the ATO to disclose information to the
Australian Competition and Consumer Commission. The Bill is currently being
revised to take into account the results of public consultation.
Navigation: Previous Page | Contents
Top
|