Timbercorp and Great Southern: the agribusiness MIS collapse

The Product Disclosure Statement ran to hundreds of pages, but the pitch took about thirty seconds. Invest in a timber plantation or an olive grove, borrow most of the money, claim an immediate tax deduction on the interest, and let the trees do the rest. By the time the crop came in, ten or fifteen years down the track, you'd have your original tax saving in your pocket and an agricultural asset on top. Accountants were spruiking it to dentists, solicitors and self-funded retirees all through the 1990s and 2000s. The two companies most aggressively selling this dream were Timbercorp and Great Southern Plantations. Both collapsed within weeks of each other in the winter of 2009. Together they left behind roughly 65,000 investors and debts that, according to contemporaneous reporting at the time of the administrations, ran into the billions.

The administrators' reports from those two collapses are, in their own dry way, instructive documents.

The managed investment scheme model

To understand what went wrong, you need to understand the structure these companies used. A managed investment scheme, registered under the Corporations Act 2001 (Cth), pools investor money into a common enterprise managed by a responsible entity. The Australian Securities and Investments Commission is the regulator that registers and oversees these schemes. In the agribusiness variant, the scheme manager would identify land, often in regional Western Australia, Victoria or Queensland, lease it, plant it with timber, olives, almonds or cattle, and sell investors a "project interest." The investor would borrow, typically from a related lending entity, to fund that interest. The loan and associated scheme fees were generally structured to be deductible upfront under the tax provisions then available, particularly Division 35 and the earlier section 82KZM arrangements the ATO had blessed through a series of product rulings.

The ATO product ruling was the engine of the whole thing. Without it, the tax deduction evaporated and the economics fell apart. Both Great Southern and Timbercorp obtained product rulings year after year, which gave the arrangement a veneer of regulatory endorsement that financial advisers leaned on heavily when recommending the products to clients. The Australian Taxation Office publishes its rulings, and the wording matters.

What the product ruling did not endorse was the underlying business. A plantation takes years to generate revenue. In the interim, the scheme manager needed a constant flow of new investor money to fund operations, service debt, acquire land and pay management fees. The model had characteristics, notably a reliance on perpetual new inflows to sustain the enterprise, that critics noted at the time, though the companies consistently rejected any such characterisation.

Great Southern: the larger of the two giants

Great Southern was the bigger operation. Founded in Perth in the early 1990s and listed on the ASX, it grew through the late 1990s and 2000s into one of Australia's largest agribusiness managers, with projects covering timber, cattle, olives and various other agricultural products. At its peak, Great Southern had raised several billion dollars from investors across more than twenty annual investment projects.

The company's model depended on continued investor participation. Each new year brought a new project, a new product ruling application, a new round of marketing to accountants and planners. The fee income from managing existing projects and originating new ones sustained the corporate structure sitting above the individual scheme trusts. When the global financial crisis hit in late 2008 and dried up new investor flows, the corporate parent found itself without the revenue it needed. In May 2009, Great Southern Limited appointed administrators. Ferrier Hodgson, the insolvency firm, took the helm. The company's shares, which had traded as high as several dollars only a few years earlier, were worth almost nothing.

Creditors were owed substantial sums. The investors themselves occupied a peculiar position: they were not creditors of the parent company in any straightforward sense. Their interests sat inside individual registered managed investment schemes, which had separate legal lives. But most investors had borrowed to invest, typically from Great Southern Finance, a related entity, and those loans remained very much alive even after the parent collapsed.

Timbercorp: the Victorian counterpart

Timbercorp listed on the ASX in 2000 and operated out of Melbourne. Its focus was primarily on timber and horticulture, and almonds became a significant part of the portfolio in its later years. The company's almond orchards in the Sunraysia district attracted considerable investor interest through the mid-2000s.

Timbercorp's collapse came in April 2009, just weeks before Great Southern's. KordaMentha was appointed administrator. Like Great Southern, the company's corporate structure sat above a series of registered managed investment schemes; and like Great Southern, a significant portion of investor money had been borrowed from a related lending entity, Timbercorp Finance.

The administrators' reports painted a picture of a business that had grown quickly, taken on substantial debt to fund land acquisitions and infrastructure, and had insufficient liquidity to survive when new sales dried up. The GFC accelerated what structural weaknesses had already made likely.

The loan problem: why investors couldn't simply walk away

This is the part of the story that caused the most lasting damage, and it's the part that gets underweighted in casual retellings.

When the schemes were marketed, the loan to invest was presented as part of the package. In many cases, the full amount borrowed, sometimes $50,000, sometimes more, was drawn down immediately and used to pay scheme fees and the management company. The investor had the tax deduction, but the loan sat on their personal balance sheet. When the schemes collapsed, the underlying agricultural assets were, in many cases, worth considerably less than the amounts owed. The trees hadn't matured. The olive groves weren't producing. The almonds needed more years.

The loans did not die with the scheme manager. They were sold. Great Southern Finance's loan book and Timbercorp Finance's loan book were acquired by third-party debt purchasers and institutional lenders in the aftermath of the collapses. Those purchasers then began pursuing investors for repayment. Litigation followed on a wide scale. The Federal Court of Australia became the venue for multiple class actions and individual disputes over whether the loans were enforceable, whether the schemes were properly constituted, and whether investors had been given adequate disclosure.

Some investors ultimately reached settlements or had debts reduced. Others did not. For many, particularly retirees who had invested on the advice of a financial planner seeking a commission, the losses were simply unrecoverable. It is not unfair to place Timbercorp and Great Southern alongside Storm Financial's destruction of a generation of retirees as a case study in what happens when tax-driven financial products are sold to people with no realistic capacity to absorb the downside.

Timbercorp and Great Southern: the regulatory questions

The collapses prompted serious questions about ASIC's oversight of managed investment schemes, the role of the ATO product ruling process in conferring apparent legitimacy on high-risk structures, and the responsibilities of financial advisers who recommended the products to clients.

ASIC took action in the aftermath, and various proceedings were brought against former directors and officers. The Senate Economics Committee examined the collapses. Parliamentary inquiries looked at the treatment of investors with outstanding loans.

The ATO's product ruling process came under sustained scrutiny. A product ruling says the Commissioner accepts that if the arrangement is carried out as described, the tax outcome will be as described. It does not say the investment is a good one, that the agricultural project will succeed, or that the fees are reasonable. That distinction was well understood inside the industry; it was not always communicated clearly to the retail investor sitting across from an accountant who was, in some cases, receiving a trailing commission.

It is easy to assume a product ruling is more of an endorsement than it actually is. Read the ATO's published guidance carefully and the disclaimer is there. But in a marketing brochure, the headline was always "ATO-approved," which is a different thing entirely. In my view that gap between the fine print and the sales pitch is the real heart of the story.

The broader agribusiness MIS ecosystem

Timbercorp and Great Southern were the largest failures, but they were not alone. The agribusiness MIS sector had attracted a range of operators through the 1990s and 2000s, and the 2009 wave took down or severely damaged several others. The broader history of great Australian corporate collapses shows a recurring pattern: a product that works while capital is cheap and flows are strong, and fails catastrophically when external conditions change. Readers who want to compare, say, another high-profile collapse, will see the same dynamic of growth outrunning cash. Agribusiness MIS schemes followed that pattern with unusual fidelity.

Not every scheme failed and not every investor lost money. Some timber projects did mature and produce returns. Some investors who entered early and did not over-borrow came out reasonably well. But the cohort who followed the advice of commission-paid planners, borrowed at the maximum, invested late in the cycle, and had little ability to service their loans when the scheme collapsed faced outcomes that were, by any measure, severe.

What the collapses left behind

The land is still out there. Some of the plantation assets were sold off by administrators and receivers to institutional buyers and larger agricultural operators. KordaMentha and Ferrier Hodgson spent years winding down the individual scheme trusts, distributing what could be distributed, and reporting to scheme members. For investors whose scheme assets returned some value, the residual distributions were often modest relative to the original investment.

The class actions took years to resolve. Litigation involving Great Southern scheme members and loan purchasers wound through the Federal Court well into the 2010s. Some judgments went against investors; others produced partial relief.

Parliamentary attention eventually produced some relief measures, but nothing that came close to making whole the investors who had been hardest hit. The lesson the regulators drew (tighter oversight of responsible entities, better disclosure requirements, restrictions on conflicted remuneration for advisers) fed into the Future of Financial Advice reforms of the early 2010s and, eventually, into the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which examined adviser conduct in detail. Tax is a recurring thread in these stories, and another tax-related scandal shows how much trust the system places on advisers and intermediaries.

The collapse of HIH Insurance in 2001 had already demonstrated how a large financial failure could cascade through thousands of ordinary Australians who believed they were protected. Timbercorp and Great Southern, eight years later, demonstrated that the same could happen through a product that was, on paper, tax-effective and ATO-endorsed. The tax benefit was real enough. The risk was real too, and it was borne almost entirely by the investor holding the loan.

For thousands of them, the trees never came in.

Ray Petrakis, Corporate Collapses & Insolvency