Buy-back mechanisms

Various buy-back mechanisms have been examined in connection with a number of primary production arrangements.

A buy-back mechanism refers to a means by which the participant's interest in the arrangement can be acquired from them under an agreement related to the operation of that arrangement. An example would be a put option offered to a participant in an agribusiness scheme to allow them to dispose of all or part of their interest, for consideration, to an entity associated with the promoter or manager, prior to the participant deriving income from the sale of the produce of the business.

If a buy-back is a feature of a scheme, we will consider it as part of the entire arrangement to determine whether there is any wider impact that will give us cause for concern.

The feature of a buy-back mechanism can significantly detract from finding that the arrangement will amount to the carrying on of a business (the argument typically put forward for the fees being deductible under the general deduction provisions).

Another aspect which will be examined is whether the buy-back price is based on the anticipated market value, or not, at the time of disposal. If the buy-back mechanism provides a guaranteed rate of return it can remove or significantly reduce investor risk.

We will examine whether there are any concerns about the dominant purpose of the buy-back mechanism and whether it may trigger the anti-avoidance provisions of Part IVA of the ITAA 1936.

We have declined to rule on the primary production arrangements that have been examined, if a buy-back mechanism was a feature of the scheme.

Guaranteed returns

If a promoter provides a guaranteed rate of return in a primary production arrangement we will consider it as part of the entire arrangement, to determine whether there is any wider impact that will give us cause for concern.