High profit margins

Like you, we have benchmark information on the costs of establishing a plantation, vineyard or similar. We often see proposals where the profit margin appears to be very high (that is, it is above what we would expect to be the norm).

We make no judgment about this issue, of itself. However, we are also mindful that such profit margins may indicate the existence of an undisclosed collateral arrangement. Before issuing any ruling, we will need to be satisfied that the profit margin represents nothing more than profit margin, and is not associated with mechanisms designed to inflate artificially any tax deductions that may be available.

Establishing just what the proposed or anticipated profit margin is, commonly involves a full and true disclosure of the anticipated expenses, together with supporting documentation showing how those expenses have been arrived at. Your application may be able to be expedited with such a disclosure.

Where your proposed profit margin is above the benchmark norm, you should expect to be asked for an explanation of why this is so (assuming the answer is not already provided).

We have found that the structure of some managed investment schemes have undergone some variations. One of the most common variations is the lease or licence of an established agribusiness to participants in circumstances where the nature of services to be provided is substantially, if not totally, the same in the year of entry as it is in subsequent years. See also initial period fees.

Usually, with these schemes, the level of management fees charged in the first or initial period is very high by comparison to the level of services provided in that same period. Also, the initial period management fee is significantly higher than the fee charged for the same services in later years. These 'excessive fee' situations require thorough examination by us. This examination will include an analysis of cash flows and comparisons of the fees to the services, and the cost of providing them in each year of the scheme, to determine whether the initial management fee contains a prepayment.

The examination may delay our final consideration of your application. In some instances, this may mean we will refuse to rule because the issue cannot be resolved to a point of providing certainty to potential participants.

    Last modified: 19 Jun 2014QC 17801