Initial period fees
We have found that the level of the initial fee charged in some agribusiness managed investment schemes has brought into question whether the full amount of the fee may be claimed as a deduction by participants. The fee structure of these schemes will be examined to ensure that the Commissioner can provide certainty to participants in relation to the application of the prepayment provisions.
The concerns about these schemes relate to the date until participants are permitted to enter a scheme and the capacity for services to be provided. This is discussed in further detail under closing date to accept participants into a scheme. The schemes are categorised as either established schemes or unestablished schemes.
Closing date to accept participants into a scheme
These are schemes where participants lease/licence an area of land which already has an established agribusiness in place - for example, a participant leases an area of land which has an olive grove planted on it prior to the participant commencing in the scheme.
We have found with these schemes that the nature of the services to be provided is substantially, if not exactly, the same in the year of entry as it is in subsequent years. The level of management fees charged in the first or initial period is generally very high by comparison to the level of services provided in that same period. We have also found that in those cases the initial period management fee is significantly higher than the fee charged for the same services in later years.
The concern about these schemes arises as a result of the date to which participants may be accepted into the scheme. Where this is late in the income year, there is substantial doubt as to whether any services of significance will be provided. In this case, the Commissioner cannot be certain that the initial fee is paid for the provision of services within the same income year only.
Such cases will be thoroughly examined and where we have concerns about the provision of services and the length of the eligible service period it may not be possible to provide certainty to participants and - as a result the Commissioner may not be able to rule.
Where a ruling may be provided, the closing date for applications into the scheme must be determined, having regard to the level of services and the quantum of fees paid. For established schemes, the Commissioner will accept a closing date of 15 June or earlier, depending on the facts of the case and the level of services to be provided. A closing date after 15 June will not be accepted.
These are schemes where participants lease/licence an area of land and contract with the responsible entity/manager to have a business established on their behalf after they commence their participation in the scheme. The fee structure and the level of services to be provided by 30 June will be examined to ensure that we can provide certainty to participants about the application of the prepayment provisions. Having regard to the comments made by Merkyl J in Carey v Field (2002) 122 FCR 538; 2002 ATC 4837; (2002) 51 ATR 40, the Commissioner must be satisfied that the services in the initial period are capable of being performed by 30 June.
In relation to these schemes, the Commissioner will accept a closing date of 31 May. However, dependent on the facts of the case and the level of services to be provided, the closing date may be extended to 15 June. A closing date after 15 June will not be accepted.