The recent collapse of Great Southern and Timbercorp has once again put into question the value of tax-effective Managed Investment Schemes.

Great Southern, Timbercorp and other companies alike provide agricultural tax breaks to ordinary investors by packaging schemes that focus on wood pulp, cattle and wine grape production.

Given that investment in many Managed Investment Schemes does not provide ownership of the physical assets, such as the land or trees, but only rights over an area of land or allotment, many investors in Great South and Timbercorp schemes have little chance of recouping their investment capital. There is also some suggestion that the ATO may rule that that the tax deductions made under the schemes are void given that the schemes are no longer operating.

Whilst the initial intention of Managed Investment Schemes was to encourage private investment in Australian Agriculture, the up-front tax benefit was always the main attraction of these investments as investors received a tax deduction of 100% of their initial investment outlay.

Unfortunately for many investors and advisers alike, the attraction of a tax break took precedence to the quality of the underlying investment. As well as providing exposure to a high risk sector, the lifespan of these investments meant that investors were unlikely to see any further return for between 5 and 20 years.

The enticement of a tax break also blinded many to the exorbitant fees applicable to these schemes. On top of upfront commissions of 10% paid to advisers and “marketing costs” of up to 5%, these schemes also charge a fixed management fee of up to 2% per annum and outperformance fees of up to 27.5% per annum.

The culmination of excessive fees and high risk investment meant that the investor had little or no chance of realising a profit from these investments. Unfortunately, as Warrant Buffett would say, “Only when the tide goes out do you discover who's been swimming naked”.

Our golden rules of investment:
• Tax deductibility of investment capital means you have made a loss which needs to be recovered by performance of the underlying investment.
• Always check the level of investment costs and commissions as they have a direct impact on returns.
• If an investment relies upon tax deductibility for success - forget it.
• Always evaluate the merits of an investment in its own right without
the tax incentives.