5 December 2001

The Directors
Enviro Systems Renewable Resources Limited
247 Glen Osmond Road
FREWVILLE SA 5063

Dear Sirs

You have asked me to prepare a letter outlining the current status of Enviro Systems Franchisees in regard to the Franchisee's current tax position.

On the basis of documentation and information you have supplied to date and other information and representations including:

• updated financial information and forecasts of the projected grower's position at harvest showing a commercial and profitable business project
• the company's intentions and plans in regard to the establishment and maintenance of infrastructure at the Franchisee's plantation at Warolin
• the development of "Enviro System" market profile and image to enhance the marketing position of the Franchisee
• the implementation of detailed Franchise systems for marketing bagged firewood supported by detailed techniques and procedures for Franchisees to market their bagged firewood

and that Franchisees entered into their Franchise's as described in the documents and made payments as described in the documents I include the following general comments for your reference.

Background

My comments presume that Franchisees has entered into two or more Woodlots on a Franchise basis with the intention of gaining assessable income from those Woodlots and remaining in the project until the project is finalised. I have also presumed that the Franchisee has been issued a part IVA determination by the ATO, amended assessments have been issued and the Franchisee has objected to that assessment.

My comments are general in nature and cannot form a conclusion in regard to any re-structuring of the Franchisee's Franchise as this has not yet been undertaken and the tax consequences of such a re-structure are currently unknown.

It should be noted that this advice is general in nature and each Franchisee should seek their own independent advice specific to their circumstances.

Currently you are negotiating with the ATO to answer their remaining queries in regard to the project and will be lodging Non-Commercial Loss [NCL] Applications shortly so that Franchisees can claim their continuing expenses from 1 July 2000.

As you have been unable to finalise ATO queries your Franchisees have not yet finalised their position as to whether to dispute the ATO's position in regard to their Franchise or settle with the ATO on a Cash Outlay Basis.

Once Enviro have finalised the ATO's queries and the Commissioner's discretion has been exercised in regard to the NCL [for continuing expenses] if there are any other matters outstanding Enviro in liaison with the Franchisee's Committee will commission an updated tax opinion from the Franchisee's Committee's legal advisers - Thomson Playford in regard to the Franchisee's exact position and options.

I am informed that you intend to write to your Franchisees suggesting that the Franchisees forward a pro-forma letter to the ATO asking the ATO to place them in a position of hold on their objection and collection action whilst final ATO queries are answered and a settlement is negotiated.

The Current Stated Position of the ATO

On 26 April the Prime Minister issued a press release stated that for persons who have outstanding objections in relation to agricultural projects would be subject to:

• A hold on Objections and Collection Actions by the ATO
• Reduction of interest on outstanding tax debts
• Relief for people facing financial difficulty

This was subsequently followed up by a Press Release [Nat 01/30] from the Australian Taxation Office where the Commissioner of Taxation confirmed:

Hold on Objection and Collection Action

Pending the outcome of the Court's judgments in the Budplan case, the ATO has agreed not to take legal recovery action on outstanding debts related to the disallowance of your claims provided you have lodged an objection on the related amended assessment that would have been issued to you.

The ATO will also hold off determining objections in these cases, until the outcome of the test cases is known.

The lodgement of an objection against either your amended assessment or your original assessment (if you did not claim a deduction in a particular year) is important to ensure you have protected your rights. If you do not lodge an objection within the required time under the law you may end up having to pay the tax even if the outcome of the test case is favourable to the Participants. It is imperative therefore that you take this matter up with your tax advisor if you have not already done so. Your tax advisor is best placed to guide you on this issue.

Interest

Although the ATO has agreed not to pursue recovery action against you while the litigation is on foot, you should be aware that interest on the outstanding tax would continue to accrue until it is paid or otherwise reversed as a result of a successful outcome to the test case litigation.

In recognition of the financial impact the continuing imposition of interest will have on some Participants outstanding tax bills the ATO has agreed in appropriate cases to reduce the current rate of interest charged from 11.89% to 4.72% [previously 13.86% to 5.86% at the time of initial release ]. The ATO have said this policy would be applied to those Participants they have described as unsophisticated investors with generally good tax records.

Any reduction in interest will, of course, be subject to the Participant entering into and following either a settlement and/or agreed payment arrangement to pay their liability.

Unfortunately because of the restructuring now being undertaken as a result of ASIC requirements, Enviro systems Franchisee's do not fit into the standard "Cash Outlay Basis" Settlement Deed currently offered by the ATO.

This is because under the cash outlay basis settlement the dollar amount represented by the round robin loan is disallowed in the year of original deduction and quarantined to be offset against income from the project in future years. For Enviro systems Franchisees we have not yet been able to determine whether the re-structuring being undertaken would constitute a new project losing the quarantined losses.

Common sense would suggest that the re-structuring of the project does not change the project and it is still the same project or if the Franchise has changed legally so as to become a new Franchise the ATO would use its discretion to treat the project as a continuing project for the purposes of the Cash Outlay Basis Settlement.

Those participants who have already paid, including the general interest charge component, or who have entered into settlement arrangements will be able to benefit from the reduction if they fit the criteria described above.

People Facing Financial Difficulties

The ATO is also recognising the circumstances of those who face genuine financial difficulties as a consequence of their actions.

The Press Release stated that officers from the ATO would work with them to find suitable payment arrangements over an appropriate period. In these cases the ATO have stated they will also be prepared to remit all or part of the interest depending on the financial circumstances. Participant's now earning less than average weekly earnings with only basic assets such as a home and car who faces a substantial tax debt as a result of their investment in the Projects.

Investors who face serious financial hardship can apply to the Taxation Relief Board for release from payment of the full debt. The ATO stated they would be advising Participants of this option but to date I have seen no such advice.

Recommendations of the Senate Committee

On 27th September 2001 the Senate Economics References Committee published a stand alone unanimous report, its recommendations included a resolution and settlement process for what the ATO call mass marketed schemes.

Whilst they are only recommendations at this stage, the recommendations significantly reduce penalty and interest on any amended assessment, with interest free period of two years on any debt (if any) to be repaid and the possibility of some or all of the tax deduction being reinstated.

Essentially the committee recommends settlement on a cash outlay basis on reinstatement of some or all of the limited recourse component of the original tax deduction.

Cash Outlay Basis Settlement - Recommendations of the Senate Committee
- 27 September 2001

In this kind of settlement the ATO agrees to allow a deduction for the cash that was paid under the terms of the original contract but not a deduction for the component represented by the loan with Blue Gum Management loan. This component is quarantined to be offset against future income from the project.

Under the terms of such a settlement:

• The ATO is to agree to full remission of penalties and interest on mass marketed investment scheme debt arising from deductions claimed in 1998/99 and earlier years;
  
  
• Investors eligible for the 'cash outlay' basis of settlement as outlined by the Committee will receive further concessions on the amount of primary tax payable;
  
  
• Investors, benefiting substantially from the remission of all penalties and interest, are to undertake to fully repay the adjusted primary tax on disallowed scheme deductions; and
  
  
• There will be no further objections or appeals lodged against the ATO in relation to this matter.
  
  
• Once the reduced tax debt is established an interest free period of two years on that debt.

Again the issue of whether the re-structuring of the project constitutes a new project or a continuation of the same project will need to be determined in regard to the Cash Outlay Basis Settlement.

Allowing the deduction claimed to stand in the first instance
- Recommendations of the Senate Committee - 27 September 2001

In this type of settlement the Senate Committee considers that where the investor has invested in a scheme that is assessed to have commercial viability, as based on the information supplied your participation in the Enviro Franchise has, the ATO should be prepared to settle with the investor by allowing the deduction claimed to stand in the first instance with the criteria for assessing the commercial viability of the scheme being:

• That the income from the investment is sufficient to have repaid the non-recourse loan used to establish the deductions within the half-life of the scheme or the term of the loan agreement, whichever is the lesser;
  
  
• If, at the half-life point of the scheme or at the end of term of the loan agreement there is outstanding debt on the loan, this amount will be treated as a disallowable deduction and reassessed on the cash outlay basis of settlement. The reassessed amount will be payable to the ATO within twelve months of the reassessment and will have interest applied to it at the reduced rate. No penalty tax is to apply.

Again the issue of whether the re-structuring of the project constitutes a new project or a continuation of the same project will need to be determined in regard to the Cash Outlay Basis Settlement.

Non-Commercial Loss Provisions - NCL

Currently Franchisees cannot claim continuing expenses in relation to the their Franchise after 1 July 2000 as the amounts are quarantined under the NCL provisions to be offset against income from the same project. I am informed that an application to the Commissioner to exercise his discretion is to be lodged shortly and once that discretion is exercised Franchisees will be able to claim those expenses.

Once again the issue of whether the re-structuring of the project constitutes a new project or a continuation of the same project will need to be determined in regard to the NCL provisions for those amounts to be claimed by Franchisees after the re-structuring has taken place.

For NCL purposes the re-structuring of the project does not change the commerciality of the project the project, based on information supplied would continue to be commercial and satisfy the Commissioner's requirements.

Summary

It is important to note that the Senate Committee's recommendations have received no official comment yet from the ATO and are at this stage are just recommendations. Even so it is reasonable to presume that the recommendations will have some impact on the ATO's approach and that the current Cash Outlay Basis Settlement on the table will be improved.

The abovementioned comments are in the nature of general comment only and individual Franchisee's should only act on the basis of their own professional advice tailored to their own individual circumstances.
If you have any queries concerning the abovementioned or any other matter do not hesitate to contact my office.

Yours sincerely
PBA ADVISERS Pty Ltd

Robert Walsh