Description
A person (the representative) becomes an authorised representative of a financial services licensee to market and sell specific Managed Investment Scheme (MIS) interests. 2. The representative, or their associate, executes the MIS documentation in their own name to create a MIS interest. The representative, or their associate, does not indicate in any of this documentation that they are acting on behalf of other parties, i.e. any partnership. 3. To fund the cost of acquiring the MIS interests the representative, or their associate, applies for loans covering 100% of the initial subscription price from a finance entity associated with the MIS. The loan is provided by the finance entity for 100% of the initial subscription costs, subject to security over the relevant MIS interest and is made on a "low-doc" basis. 4. The representative receives commissions from the MIS manager or financial services licensee for the sale of the relevant MIS interest. 5. Subsequently, the representative organises groups of individual investors, to invest in these MIS interests on the basis that they will purportedly be partners in a partnership (the 'partnership'). The representative advises these investors that they will be covered by relevant Product Rulings for the particular MIS. 6. There is limited or no documentation supporting the formation of the 'partnership' or the ongoing obligations and rights of investors. In some cases, investors are allegedly admitted to the 'partnership' later, even after the income year in which the expenditure is incurred. 7. The investors do not execute any MIS documentation themselves, nor are their details provided to the Responsible Entity for the relevant MIS. 8. The representative may be the tax agent for the investors and may administer the 'partnership'. 9. Repayments on the loan to acquire the MIS interest are initially planned to be met by: a. tax refunds from investors claiming deductions for: (i) a share of the loss from the 'partnership' arising from the initial subscription, and (ii) subsequent year interest claims for the loan to acquire the MIS interest, b. the input tax credits claimed in respect of the initial subscription price, c. purportedly assigned commissions received by the representative for selling the MIS interests, and d. returns from investment of the tax refunds, input tax credits and commissions received before the periodic repayments of loan and interest. There may be no other mechanism to repay the balance of the loan or meet interest commitments. 10. The representative may retain a bonus or other fee from the income earned from the investments of the above funds or from the MIS interest itself, prior to applying the balance in repayment of the loan. 11. The representative may seek to assign the 'partnership' interests to other entities before the MIS produces income. 12. Subsequently, the 'partnership' defaults on loan repayments; the financier follows collection procedures and may ultimately take ownership of the MIS interest to mitigate losses, including recovery of the outstanding loan balance. 13. Due to the above features, investors in the 'partnership' may not have either a legal liability for the loans or a legal entitlement to any income from the MIS interests.