Tuesday, 20 February 2007

Farmers and MIS

I have been surprised by the shrill support for MIS schemes from sections of the farming lobby. There seems to be a widespread misconception that MIS schemes are the only way to attract funds into the farming sector.

Some discussion about whether a MIS structure is an efficient way of granting assistance to farming industries might be helpful.

Why don’t we organise other industries in the same way? Isn’t the MIS system an inefficient structure? If $700 million is invested in plantations, the Government’s share will be $300 million (via tax subsidies). But only about 20% or $140 million is spent on direct plantation costs. So the Government spends $300 million and gets $140 million worth of trees which don’t even belong to them. And MIS investors part with $400 million. Where does it all go? To financial planners? To all the paper shufflers who organise the schemes? To the shareholders of the MIS promoters? To MIS companies to be used to fund other land purchases? How much has each received? Is this sensible public policy? I always thought a requirement of sensible industry assistance was that it not be open ended and that it be directly targeted. Has this happened?

We have witnessed the explosive growth of MIS schemes across a range of products, from plantation trees to grapes, olives, avocados, abalone, pearls, you name it. It is not beyond the wit and imagination of MIS promoters, accountants and lawyers to package any industry, not only primary production, to be sold off to willing investors as tax deductions. Is this what we want?

There are some who are quite happy with this approach. Who cares if there’s not much return at the end of the day? After all the Government subsidises a fair chunk of the initial investment via the tax system. But this masks a failure to grasp the simple fact that extra public cost simply add to the overall social cost and makes us all worse off. It doesn’t matter in the first instance if it’s a public cost or a private cost, it’s still a social cost borne by the community. We can’t afford to spend money as a community without knowing the full social costs

It has surely not escaped the attention of MIS supporters, that the Government has proposed unexpected and exceedingly generous alterations to the Superannuation System. It will soon be possible for most taxpayer of any age to gain a tax deduction for contributions of up to $50,000 pa into a Super Fund where subsequent tax paid will be no more than 15%. MIS companies know that the attractiveness of their products will wane with the new Super changes.

I am reminded of the oft repeated mantra of the level playing field. Precisely! Let people take advantage of the level playing field that applies to all contributions from all ages to all Super funds. The Government will allow all taxpayers the same tax concession from 1st July 2007. Do we have to give additional assistance to MIS promoters? If their products are so good, then Super Funds, having paid only 15% tax on the funds they have received, will happily invest.

Very few Super Funds invest in MIS schemes because they are simply bad investments. But Super Funds are increasingly investing in rural land and even livestock. However they need alternative pooled investment products not MIS schemes.

MIS schemes are designed to allow taxpayers the benefits of immediate tax deductions and they rely on the support of the ATO Product Ruling system whereby each participant in an MIS scheme whether they own a few seedlings in some far flung part of the continent they had never visited, or whether they lease one or two cattle from some promoter after signing six different agreements, they are still considered to be carrying on a business. I have trouble recollecting a better example of high farce.

From an economic policy perspective MIS schemes have no arguable merit. Can anyone honestly argue that MIS schemes have produced optimal resource allocation in the grape growing industry?

MIS schemes are not a solution. MIS schemes provide tax deductions for investors but not much else. The underlying land is usually owned by the MIS company. The MIS investor might own a few trees or lease a few cattle but any income comes only after the MIS company has paid itself for any costs. There’s not a sharing of risk. For the MIS company there is no downside. All risks are borne by the MIS investor because he’s the bunny who’s been bought off with a tax deduction based on the legal fiction that he’s a primary producer. He only invests because of the tax subsidy offered by the Government. It’s an appalling way to structure our economy.

The Government has at last agreed that non plantation MIS investments are simply a speculative passive investment and not part of a primary production business.

The farming lobby needs to review their misguided and short sighted support for MIS schemes which last year attracted $1.1million implying that government subsidies via the tax system were $500 million approximately in that year. This is a lot of assistance to give in such a poorly targeted inefficient manner. It inevitably means a lot less assistance for fair dinkum farmers.

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