Managed investment schemes have a dark cloud hanging over them in light of a recent Australian Tax Office move to stop investors claiming a 100 percent deduction in the first year. The ATO plans to abolish the tax deduction for all future agricultural managed investment schemes (MIS) with the exclusion of those involved in forestry. Non-forestry MIS include such agribusiness ventures as almonds, avocados, olives and viticulture. Tax incentives were initially introduced as a compensation for investors who otherwise would have had to wait perhaps 10 years before they saw a return. This was predicated on the length of time it would take for the agricultural product to reach maturity. But of late some have argued that investors have been putting their money into an MIS solely for the tax breaks rather than for the investment itself. In the 2005-06 financial year some $1.14 billion flowed into MIS, according to figures from the Australian Agribusiness Group (AAG). Marcus Elgin, managing director of AAG, says he expected that figure to grow to $1.2 to $1.3 billion in the current financial year. Of that investment, Elgin estimates that two thirds of that money will go into timber and the balance into agricultural schemes. And this is why the tax office has chosen to clamp down on the schemes adopting the view that such investors are not carrying on a business through these investments and therefore should not claim a tax deduction. The ATO plans to run a test case to see if their argument is supported. If it is and the test case is concluded before the end of the next financial year, then the deduction will automatically go on that date. As a result it is unlikely that there will be many new non-forestry MIS next financial year as few promoters would be willing to take the risk of an ATO success and the immediate end to deductibility. Elgin believes this possibility will encourage a push into agribusiness schemes in the current financial year. The ATO move has been met with a mixed reaction, even among farmers. Some welcome the plan to can the upfront tax deduction saying that the promoters of agribusiness schemes distorted land values and undermined community life in the bush. "An MIS will outbid farmers every time and then large tracts of land are put into trees," says Geoff Krick, chairman of the economics committee of the Victorian Farmers Federation. So if properties are run as plantations then the local community loses out as there is no farmer on site, no children going to the local primary school and no spouse spending money at the local shops. But Elgin counters this saying agribusiness schemes are very positive in their treatment of the land and that land prices have gone up everywhere. "MIS are more careful about land use and environmental management as there is such a high level of public scrutiny," says Elgin. If the ATO gets its way, will money still find its way into agriculture? Strictly speaking this should be the case as tax incentives should not be the major drivers for investment in agriculture. Tax breaks should merely be a bonus with returns playing a greater role. There are more than 70 listed agribusiness companies in which to invest including one of Australia's oldest companies Australian Agricultural Co. In addition there are also unit trusts such as Rural Funds Management (RFM). With RFM projects there is no upfront tax deduction but rather the investment is marketed as an opportunity to diversify your portfolio. "Agriculture is negatively correlated with other assets," says Andrea Lemmon, chief operating officer with RFM. "We offer portfolio diversification." One RFM trust is the Chicken Fund which pays income quarterly and offers annual liquidity by giving investors the opportunity to sell your units back to the fund once a year.