A lobbyist once relayed an interesting anecdote involving one of his clients. The client was discussing an impromptu encounter with former Treasurer Peter Costello in the QANTAS Chairman's Lounge at Sydney International Airport.
The client said to the lobbyist:
"I saw Peter Costello in the Chairman's Lounge this morning. I told him about the tax law reform idea you and I had been working on. He seemed pretty interested and said we should bring a proposal to Canberra. I thought if we went down next week, we could get it in before the budget. What do you think?"
At that time, the Federal Budget was two weeks away. The Expenditure Review Committee; the group of Government overseers who give a tick or a cross to ministerial requests for funding in the Budget, had concluded weeks earlier. The Federal Budget papers were about to be printed with only a few minor tweaks remaining.
The lobbyist was eventually able to pick himself up off the floor and wipe away the tears of laughter; his client still wondering what he had said that was so amusing.
The truth is most investors, financial planners and business operators have very little idea as to the grinding effort that is often involved in changing federal legislation. The process can require a succession of mind-numbing meetings that take place over weeks, months and even years, particularly within the economic portfolios.
An amendment to any piece of economic legislation commonly involves submissions from interest groups; modelling by Treasury; extensive discussion within government ranks; and of course debate with the Opposition.
A classic case study which played out like a soap opera in the dying months of the Howard Government was the issue of forestry and non-forestry managed investment schemes (MIS).
Managed investment schemes involve investors taking out a packaged investment in a particular project or operation. Forestry MIS obviously involves forest plantations such as pine, blue gum and other timber varieties.
Non-forestry MIS can involve plantations of walnuts, strawberries, hazelnuts, olives and numerous other unorthodox crops.
Until recently, the attractiveness of these schemes to investors was that they received immediate deductions for most of the amount they invested.
This was because the Australian Tax Office (ATO) considered the investor to be effectively "carrying on a business"; for example as an olive grower. Therefore, the amount they invested, whether it was spent on leasing land, tending the vines or administration was immediately tax deductible. In 2005, the Government announced it would conduct a review of the tax treatment of forestry managed investment schemes. Suffice to say this sent a collective shiver through the forestry MIS industry, which was desperate to maintain the status quo.
This shiver turned into a full blown tremor in early 2006 when the ATO decided that it was going to draft a new ruling for non-forestry managed investment schemes from 1 July 2007.
The ruling deemed that investors in non-forestry MIS were no longer considered to be carrying on a business. Rather they would be treated in the same manner as shareholders in companies. The result was that investors would no longer be entitled to any tax deduction for expenses relating to "carrying on a business".
Although there was no mention of this ruling being extended to forestry MIS, the forestry industry felt the shadow of a sharpened tax axe creep over them.
Many in the Howard Government thought this was a reasonable decision and argued that MIS were nothing more than a tax rort long overdue for abolition.
The Assistant Treasurer at the time, current Shadow Finance Minister Peter Dutton gave strong consideration to backing the ATO's position on non-forestry MIS. He was also rumoured to have some sympathy toward extending the ruling to forestry MIS as part of the Government's review.
This murmuring of support for the ATO's stance emanating from Parliament House reached the ears of forestry investment companies like Great Southern, Timbercorp and the National Association of Forest Industries. These organisations had hundreds of millions of dollars of investors' money tied up in MIS; both forestry and non-forestry projects.
Like an erupting nest of angry ants they sent a cohort of lobbyists and other representatives to the nation's capital to plead their case. Their voices joined the smaller groups from the non-forestry MIS sector, such as the strawberry and olive growers, already clamouring against the ATO's decision.
This menagerie of forestry and non-forestry delegates lobbied the Assistant Treasurer; the Shadow Assistant Treasurer; front benchers and back benchers from both sides of politics.
They were tenacious in their approach; like a Jack Russell swinging from a bedsheet on the clothes line.
The forestry MIS industry at least found an ally in the then Agriculture, Fisheries and Forestry Minister Eric Abetz.
Senator Abetz supported the forestry MIS companies and argued that forestry plantations were an important environmental and economic asset and that investors in the schemes should continue to receive immediate deductions to foster industry sustainability. He also argued that the length of time for a plantation to reach maturity meant that the favourable tax treatment was necessary to attract capital. Abetz also had some sympathy for the plight of the non-forestry MIS projects, though he was a little less overt in his support.
Both the Assistant Treasurer and the Minister for Agriculture, Fisheries and Forestry also received an abundance of counsel from their colleagues, particularly those in electorates with high concentrations of managed investment schemes. On more than one occasion the advice offered had not been solicited.
Some within the Government, like Member for Moncrieff Stephen Ciobo offered regular and impassioned pleas in support of non-forestry MIS.
Ciobo argued it was ridiculous to suggest that investors would pour thousands of dollars into almond and macadamia nut projects in the hinterlands around the Gold Coast of Queensland, simply to obtain a relatively small business tax deduction.
He suggested that if tax minimisation was the sole objective, investment in non-forestry MIS was a waste as the amount of capital being invested would achieve greater net returns using other investment vehicles.
One of the most vocal opponents of all managed investment schemes was country NSW Senator and media favourite, Bill Heffernan.
Seen as somewhat of a maverick by many Liberals and a pariah by others, Heffernan is nothing if not vocal as to where he stands on any given issue.
Heffernan argued that farmers who scratched a living off the land had to compete for finite water resources with "dodgy" forestry plantations and walnut farms that had massive capital resources behind them due to the generous tax treatment of investments.
He argued that managed investment schemes did not produce sustainable crops or harvests and if it weren't for the 'tax rort' they would collapse.
The Senator's vehement opposition to MIS led to some heated and colourful exchanges during sessions of the Government Backbench Committee.
The Committee was chaired by the late South Australian Senator Jeannie Ferris. Indeed Senator Ferris seemed to be the only one capable of quieting the rowdy Heffernan during presentations by the Assistant Treasurer and the Minister for Agriculture, Fisheries and Forestry.
"Bill! Be quiet!" was uttered almost every five minutes and every time the iron-spined old farmer obeyed.
As the numbers stacked up, around half the members and senators of the committee supported the tightening of the tax treatment of all MIS, while the other half strongly opposed removing the favourable treatment for either sector.
The floor was often open and members of the committee from both sides were given a chance to raise issues and ask questions. Of course every time a point was made by the pro-MIS contingent it was accompanied by a noisy interjection from the sidelines quickly followed by "Bill! Be quiet!" The heated arguments reached their zenith when Senator Ferris informed Senator Heffernan that if he interjected one more time, he'd be asked to leave.
"You'd have to carry me out," replied Heffernan.
"I'd carry you out," offered one normally gentle National Party Member who had obviously had enough.
In a low voice, Heffernan proceeded to explain exactly what would happen to the National Party Member if he tried to enact his promise.
Thus the battle lines stagnated into pitched attrition; Government supporters of forestry and non-forestry managed investment schemes in one trench; Government opponents of all MIS in the other.
Labor had the luxury of watching the fracas from the sideline while lobbing the odd grenade into parliament or the media.
Unfortunately their opportunism came unstuck on more than one occasion. During one incident, the Labor spokesperson in the House of Representatives was caught contradicting the Labor Shadow in the Senate as to what the ALP would do on MIS if they found themselves in government. Of course this was not widely reported in the national press.
However for all the theatrics, Ministers Abetz and Dutton understood the need to find a viable compromise. Having weighed up all the issues raised by the industry representatives and their colleagues and with the 2007 federal election fast approaching, they set about hammering out a decision that would go some way to quelling both sides.
Eventually a breakthrough decision was reached.
The Howard Government announced it would abandon the review of forestry MIS and instead amend the legislation so that investors would continue to receive the immediate upfront deduction. The only significant condition was that at least 70 per cent of the investment had to be for actual work carried out on the project, that is, not simply used for administration costs.
The Government decreed that forestry plantations were a valuable asset in the national interest, and as trees took time to grow, the favourable tax treatment was necessary to attract capital investment.
The Government upheld the ATO's new interpretation of what constituted "carrying on a business" for non-forestry managed investment schemes. The decision meant that investors in non-forestry MIS would no longer be able to claim a deduction on 'business expenses' relating to the schemes. However, the Government did establish a one year transition period for the non-forestry managed investment scheme industry to sort out their affairs and launch a test case in the Federal Court.
A favourable result in a test case would overturn the ATO's decision and restore the business tax deductions for investors in non-forestry MIS.
Overall, the decision was welcomed within government ranks. Even Farmer Bill seemed to agree. It was rumoured that late one night at one of Canberra's fine restaurants he was overheard to say "I'll let them have their trees".
Industry groups too, generally welcomed the compromise and began preparations to mount a test case in the courts.
This compromise was reached and announced in stages between December 2006 and February 2007. The final result had taken almost 18 months of lobbying, negotiating and back room brawling.
Sadly, the issue has still not been put to rest.
Investors with interests in non-forestry MIS are still awaiting the result of the test case in the Federal Court. It is extremely unlikely the case will be wrapped up by 1 July 2008. The latest rumours suggest August at the earliest.
Further, the new Government is not providing any direction as to whether or not the ATO's decision to remove the tax advantage for non-forestry projects will be upheld from 1 July 2008, even though a decision has not been handed down by the courts.
This leaves many investors and the non-forestry MIS industry with a great deal of uncertainty going into the new financial year.
Of course if the court case eventually finds in favour of the ATO, there is the chance of a lengthy appeal.
Whether viewed as a wasteful soap opera or simply the reality of governing in a modern market economy, this case study illustrates how complex the passage of federal legislation can be.
Investors, planners and those in business need to understand that if they intend to embark on the challenge of changing federal legislation, particularly within economic portfolios, they should prepare for a long haul.
They should also try to steer clear of boisterous senators from country NSW.
