Barossa Vines and its directors have been fined more than $1 million for breaching promoter penalty provisions following an investigation by the Australian Taxation Office.
The Tax Office has issued a warning to managed investment scheme operators to implement the schemes as promised, or risk high penalties.
Barossa Vines had been running a managed investment scheme and failed to carry out its wine grape growing activities in accordance with its agreed product ruling.
The company was ordered to pay a penalty of $625,000 while its four directors were made to pay $125,000 for poorly managing the scheme.
The schemes took place during 2007 and 2008 and saw investors in the scheme to pay an upfront management fee of $4400 to establish and manage a vineyard on the land.
Hundreds of investors took part in the schemes with a total of more than $20 million invested across the two schemes.
ATO deputy commissioner Tim Dyce said in a statement product rulings are designed to give people certainty about the tax consequences of their investment.
“The scheme must be implemented as it was described,” he says.
“As we discovered, this was not the case and the promoters’ actions had unfortunate consequences for investors, whose deductions were disallowed.”
The ATO has the capacity to withdraw product rulings at any time and a ruling does not give an investment a tick of approval.
Thomson Reuters tax expert Terry Hayes told SmartCompany these types of schemes were popular a few years ago.
“A lot of the heat has gone out of these managed investment schemes now. The problem arises with the product rulings – if the scheme runs in accordance with what the ATO understand, then it’s fine, but if it deviates in any way then the product ruling is no longer valid,” he says.
“When there is a variation, this means the tax consequences change, impacting upon investors.”
Hayes says in this case a number of vineyards weren’t planted in the appropriate timeframe and some had been abandoned, going against its product ruling.
In an interview with The Australian Financial Review,Dyce said the ATO is reviewing a number of similar cases and considering litigation.
“We occasionally find people will hand over $100,000 or $200,000 to somebody based on a glossy brochure and a promise,” he’s quoted as saying.
Hayes says people opt to invest in these schemes on the promise of great returns or tax deductions.
“They can offer some fairly good returns and deductions and if the ATO approves the arrangement generally they’re fine. Some people plan for a loss to reduce their tax, but not everyone can afford to sustain a loss,” he says.
“This was a big fine, I’d say probably one of the biggest which has been levied, but it’s within the parameters of what the legislation allows.”
Hayes says people running these schemes should inform the ATO if circumstances changes.
“The people managing these schemes are often doing all they can to keep them afloat, but seasonal patterns can have a big impact on agricultural schemes.”
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