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Legendary bank robber Willie Sutton was a clear thinking sort of guy. When quizzed as to why he robbed banks, he replied that’s where the money is.

Had he been born 80 years later Willie could well have become an MIS promoter.

The ATO’s first attempt to impose civil penalties on tax scheme promoters has seen two taxpayers, Ludekens and Van de Steeg, hauled before the courts.

The tax scheme involved Gunns’ 2006 MIS woodlot scheme. Normally the MIS company is considered to be the promoter but in this instance the scammers interposed themselves between Gunns and the grower/investors. This is what made the case slightly unusual. The complexity of the alleged scheme makes the court decisions inaccessible for a lot of readers. The first hearing in Sept/Aug of 2012 before Justice Middleton of the Federal Court who handed down his decision in March 2013 found against the ATO but before a full Federal Court, in August 2013 the ATO successfully appealed.

The attraction of an MIS scheme to a grower/investor was gaining a 100% deduction for amounts outlaid to fund the planting of woodlots, especially if the MIS company provided 100% finance to grower/investors, which invariably was the case. This meant tax deductions without cash outlays, every tax avoider’s dream.

In practice it was even better than that, positive cash flows no less.

Imagine a grower/investor was lent, say, $11,000 by a MIS company which was immediately paid back to the company to purchase a woodlot investment. This invariably happened on 30th June in the accountant’s office with heaps of documents signed and cheques exchanged.

On 1st July the accountant would lodge a Business Activity Statement(BAS) for the woodlot investor claiming a GST refund of $1,000, and just like magic an amount is soon received from the ATO.

Lodgement of the tax return claiming the GST exclusive amount of $10,000 as a deductible claim for carrying on a business of tree growing soon results in a further refund of up to $4,500 depending of course on the grower’s marginal tax rate.

That makes the score, cash inflow: $5,500, cash outflow: nil.

Gunns paid as much as a 15% commission to accountants and others for inducing grower/investors to purchase woodlots, so in this instance let’s add a further $1,650 to cash inflow.

Now imagine if a scamster became aware of all the cash that that could be created by signing a few documents. That’s what happened. Gunns was approached by gentlemen who ended up being taken to court by the ATO ( the defendants) in the aforementioned case to invest $22 million , 100% financed by Gunns, in 3,250 woodlots on behalf of 10 partnership comprising groups of grower/investors.

Gunns offered

·      100% finance = $22 million.

·      commission of 15% on $22 million = $3.3 million.

The defendants lodged BAS returns on behalf of all 10 partnerships and soon $2 million was posted into one bank a/c. Yep, that’s right it was all channelled into the defendant’s bank a/c. Bad move boys. Bound to raise alarm bells at the ATO when BAS refunds from 10 different partnerships are all funnelled into one bank a/c controlled by guys with a dubious past.

Further problems arose when the partners’ names as per the BAS returns didn’t quite reconcile with the names on the documents signed with Gunns after the latter agreed to advance $22 million to the 10 different partnerships, which, it eventually transpired were only verbal agreements. The norm with tax schemes is to attempt to trump substance with form but the guys didn’t even bother in this case. Not wanting to put too fine a point on it, the boys did a bit of backdating, chopping and changing things. Even a second round of partnership registrations to correct flaws with the first lot was not enough to persuade the ATO that the partnerships were entitled to GST refunds. The appeal judges found:

“it cannot be said that any of the so-called “partnerships” acquired the woodlots in carrying on a business or an adventure or concern in the nature of trade. (Certain secondary investors) although named as partners, had no intention of the “partnership” of which they were a “member” carrying on a business or an adventure or concern in the nature of trade. They merely permitted their names to be put on the documentation to allow the respondents…...... to acquire the woodlots from Gunns.”

It was an adventurous gambit. The defendants’ plan was to build up a cash pool from the commissions ($3.3 million), the GST refunds ($2 million) and from income tax refunds from partners ($6 million) many of whom weren’t fair dinkum partners, but bunnies used to gain tax deductions. It was quite extraordinary. The cash was to be used in a foreign exchange money-for-jam ploy conducted by the defendants. But as described by Neil Chenoweth in the AFR on 26th September 2013 the defendants’ other schemes were falling apart. It seems probable that cash from Gunns was intended as a lifeline for these other failed businesses.

Needless to say it was only a few months before the defendants starting falling behind with monthly payments on the $22 million loan from Gunns. However not before the GST refunds of $2 million and the commission of $3.3 million from Gunns were received. Some partners received tax refunds based on the initial claims which were handed over to the defendants as agreed. It is understood the ATO has subsequently disallowed the claims for the purchase of woodlots and reversed the partnerships’ entitlements to GST refunds.

So what did it cost Gunns? First the GST of $2 million subsequently paid by the ATO to the defendants would have been paid in the first instance by Gunns to the ATO. Second the commission of $3.3 million was paid to the defendants. And third the planting costs for the 3,250 woodlots would have cost in the vicinity of $6 million. That’s a total of $11.3 million.

MISs were, in boom times, a cash flow bonanza. It certainly was if grower/investors paid cash up front. Also if investors paid the monthly finance amounts it was fine, especially as in some cases Gunns was able to bundle up the loans and sell them to investor(s) for a lump sum amount roughly equal to the present value of the future loan repayments. But if investors start reneging on loans, cash flow dries up, the asset value on the loan becomes impaired resulting in write downs against profits and a diminished balance sheet. That is one reason Gunns’ demise occurred and why it became impossible for Gunns to find equity partners. One glance at Gunns’ loan book would have been enough to place seeds of doubt in the ability of Gunns to run any business let alone build a $2.3 billion state of the art pulp mill.

The offer to the defendants and presumably the necessary due diligence came from two of Gunns’ executives Messrs Blanden and Baker. It all occurred just after Gunns stepped outside the RPDC process and also at the time Gunns acquired Auspine boosting bank borrowings to over $1 billion, hardly the time to be showering cash on persons with a dubious past just to rack up another sale. Not to mention Gunns was also trying to fund a pulp mill. It just confirms the Ponzi nature of MISs when making any sale was a vital positive feedback event leading to more sales, more important than bothering to check the credentials of a borrower about to be given $22 million.

Read the full article on John Lawrence’s website, Tasfintalk, here