The Rinehart Trust

By Legal Eagle

by PAT in the Canberra National Times

For those who have been wondering what on earth is going on with the Rinehart family trust and the accusations thrown around by various family members, you need to go read Marcellous’ excellent summary here.

UPDATE: Apologies to PAT of the Canberra National Times whose original Rinehart cartoon (of which this is an excerpt)  appeared in that august publication last month and may be found here along with some of the best from his/her rest.-ADMIN DEM

26 Comments

  1. kvd
    Posted March 12, 2012 at 11:29 am | Permalink

    This was said to lead to substantial taxation liabilities which would in turn lead to the children’s bankruptcy. You don’t need to know how this could be so …

    Marcellous that’s probably the most interesting thing in the whole sorry saga. So if you are aware of ‘why is it so’ I’d appreciate a comment from you.

  2. kvd
    Posted March 12, 2012 at 1:40 pm | Permalink

    LE: which leads to bankruptcy – how?

    Are you saying that the trust continues in such form that the income is taxed direct to the beneficiaries, but that they have no recourse to the trust funds sufficient to settle that liability?

    I really need to get out more.

  3. Posted March 12, 2012 at 1:59 pm | Permalink

    KVD: it’s not clear whether it was so in this case or not and the word from the experts is it would not be.

    The relevance is GH’s assertion that it could be so and her use of that as a means of pressuring her children to agree to extension of her control of the trust on terms proposed by her. The assertion was said to be based on tax advice which GR declined to provide to her children.

    It seems from some of GR’s subsequent preemptive rebuttal that GR claims there was nothing remarkable about those terms. A bit more is likely to come to light about that in the near future now that the pleadings and the affidavit in support of the initial application are available to the press.

  4. Posted March 12, 2012 at 2:13 pm | Permalink

    KVD:

    Small correction: would not normally be. They then add that in a particular case things might be different.

  5. kvd
    Posted March 12, 2012 at 2:45 pm | Permalink

    Thanks Marcellous. I take it from your responses that you don’t quite understand either.

    Which is not to distract at all from your dogged and otherwise very clear post. Thank you, but I really ‘do need to know’ how ‘this could be so’. Just out of academic interest.

  6. Posted March 12, 2012 at 6:44 pm | Permalink

    KVD

    You’re right. It’s too technical to try to work out, especially because it is questionable that it is the case anyway and the available facts are too sketchy to be worth working out.

    It certainly seems odd that vesting would lead to bankruptcy.

    The trust assets are reportedly a minority (< 25%) shareholding in a privately held company (Hancock Prospecting) otherwise controlled by GR. That leads to the next question, which might have been the point of GR's claim that the case would not succeed: one cannot assume that directors appointed by GR or liable to be removed by her would be particularly forthcoming with dividends to her rebellious children, even assuming they wrest control of their shares from her.

  7. kvd
    Posted March 12, 2012 at 7:05 pm | Permalink

    [email protected] it is that sort of honest response which I most respect. It will be interesting to read your further takes, should any real information come into the public arena.

  8. Posted March 13, 2012 at 12:03 pm | Permalink

    A nice little earner.

  9. kvd
    Posted March 14, 2012 at 2:06 am | Permalink

    Most specific description yet of the tax/bankruptcy issue here. Must say I find this quite fascinating, in a guilty sort of way.

  10. kvd
    Posted March 14, 2012 at 2:58 am | Permalink

    Leaving aside the ghoulish interest in watching this slo-mo disintegration, I am wondering if anyone can shed light on any of the following:

    1) Why should the direct vesting of assets trigger a CGT event?
    2) What would be the cost base upon which any CGT would be calculated?
    3) Is it possible for one’s affairs to be so arranged as to defeat the collection of any tax then due, whilst still retaining ownership of the asset through a bankruptcy?

    Where’s Patrick when you need him? 😉

  11. Patrick
    Posted March 15, 2012 at 8:37 pm | Permalink

    LE is substantially right in all her comments.

    Basically they are taxable each year on their actual share of the dividend income and any other actual income (perhaps interest and any capital gains from a sale of shares – but that doesn’t seem possible at present) in the trust. No drama since they get the dividend cash and can meet the tax bill.

    If however the trust vested they would in effect be deemed to make a capital gain of the market value of the Hancock shares minus their cost base in their trust interests, not in the shares.. Their cost base (in the trust, not in the shares!) is almost certainly nil, and so Mummy’s probably right.

    I initially thought that they have some ulterior tax motive in mind, but I’m fairly confident that isn’t the case here now.

    What I was thinking of is Murdoch v Commissioner of Taxation [2008] FCAFC 86 (28 May 2008) in which the Murdoch family managed to get the Murdoch family trust to pay compensation to Dame Elizabeth (for not requiring News to pay more dividends and thus depriving her of trust income!) and thus get a capital gain, which I think might have actually been wholly untaxed as a gain with respect of a pre-CGT asset.

    The tax saving on that $85m was obviously substantial.

    Critiical to the case was that Dame Elizabeth had an eminent QC opine that she ‘might’ have an action against the trust (or actually against Keith as the remainderman of the trust, since strictly speaking she claimed that he was artificially boosting his capital interest at the expense of her income interest by suppressing dividends, which went to her, thus boosting the share value, which would accrue to him).

    For sheer interest’s sake, in light of the restitution thread currently going on, and Heydon J making oblique references to the ghosts of judgments past, I’ll note in passing that the eminent QC whose advice ‘sealed the deal’ for the dear Dame was, of course, Dyson Heydon QC.

  12. Patrick
    Posted March 15, 2012 at 8:40 pm | Permalink

    KVD, in effect I gave you an example of how you might approach your question 3.

    I can probably think of a few others but there would be many an hour of work between my thinking and anyone daring to actually advise someone to do it.

    So in short, absent millions to spend on advisors, there is no way to avoid that tax bill falling due at some point (but nor is there any obvious reason to trigger it given the rather healthy dividend flow!!)

  13. kvd
    Posted March 16, 2012 at 3:07 am | Permalink

    Thank you Patrick; most interesting comments!

    I am still wondering what happens to the assets involved if GR’s worst case scenario of bankruptcy played out. Not to waste further of your time, but I will just record my continuing disillusionment at the amount of productive time spent avoiding/minimising tax liabilities. A general comment, not a technical comment.

  14. Patrick
    Posted March 18, 2012 at 5:43 am | Permalink

    It’s very simple kvd, think how much you might work to earn $X.

    Then ask yourself if you are being really rational not working as hard to avoid incurring $X of taxes.

    Maybe you see your tax as purchasing something, and you think the price is fair as it is, or maybe you don’t.

  15. Patrick
    Posted March 18, 2012 at 5:45 am | Permalink

    In a bankruptcy, as the trust would have vested, the assets would just be sold.

    Of course they could borrow enough against the shares to pay the tax if they really wanted, and then sell the shares to repay the borrowing with change (and then some), so they actually would avoid banktruptcy with any sense. I hadn’t thought that through earlier, thanks for the prompt!

  16. kvd
    Posted March 18, 2012 at 7:50 am | Permalink

    Well, I can understand establishing a trust with terms protecting against borrowing secured by the corpus, but if the trust was to be finalised then I can’t see how any beneficiary (now a direct owner) could be precluded from using the asset as security to pay a tax bill.

    Further, if the trust is extinguished, finalised, then I could understand a company provision ensuring first offer to be given to existing shareholders, but nothing more proscriptive than that.

    And finally, to get back to my earlier point, if I were faced with a $100M tax bill in order to get my hands on $1Bn, then I don’t think I’d hesitate too much. That said, all of this is based upon newspaper reports, so no doubt is totally at odds with the reality of the situation 😉

  17. Posted May 9, 2012 at 3:34 pm | Permalink

    Just to mail in the latest development, which brings to the fore the scenario adverted to by me @8.

    GR has now brought forward the vesting of the trust. (Ironically, it was the threat to do this which precipitated the suit.) GR is now the trustee of a “bare trust.” The three children are still seeking accounts of the trust going way-back and GR’s removal as trustee of the trust.

    GR is refusing to release to the children the tax advice she has which says that they face an enormous tax bill as a result of the vesting of the trust.

    The real fight looming now is whether the children can derive any present advantage (ie money) from their minority shareholding in HPPL when GR has >75% voting power quite apart from the trust. The question will simply be more pressing if the warned-of tax liability is presently payable.

  18. chun ho
    Posted June 27, 2012 at 3:01 pm | Permalink

    hi all

    to explain this the simplest way, when you vest a trust, the trust distributes the shares of Hancock Prospecting to the individual beneficiaries (son n daughters).

    from a tax perspective, the trust is deemed to sell the shares of Hancock Prospecting for market value (which has a great capital gain here) and the individual beneficiaries are subject to the capital gain tax.

    hope i answered ur questions the simplest way

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