Email trail to seize Hancock trust
"Your five-minute study of the tax act can hardly be used to challenge the advice of PwC's [PricewaterhouseCooper's] tax experts," Gina Rinehart's estranged son John Hancock was told one day before a multibillion-dollar family trust was due to vest - finally granting him financial independence.
The email was one of many sent to Hancock from his mother's right-hand man, Jay Newby, days before the family trust was due to vest on September 6, 2011.
The email barrage attempted to convince Hancock - and his siblings - to extend the vesting date and sign over the voting rights of the shares to Hancock's mother or face bankruptcy.
"Please don't think for one second this means you can enjoy your Thai palace should a court-appointed designate be appointed for your bankruptcy," Newby wrote, referring to Hancock's then-residence in Thailand.
But BusinessDay can reveal that days before these heavy-handed emails were sent, Newby - the chief financial officer of Hancock Prospecting (HPPL) - had offered Hancock a role as chief executive of a proposed new $300 million-plus family investment company, "ICo", a subsidiary of HPPL, specifically for the investment of listed companies.
HPPL has a portfolio of shares worth more than $350 million, including a 14.9 per cent stake in Fairfax Media, and a 10 per cent stake in Ten Network. "My suggestion is, if you agree with the initial terms, you sign it and send it back, together with your own thoughts as to how to take this forward (and perhaps give some thought to compensation and how to get yourself equity)," Newby wrote on August 31, 2011.
The proposal became subsumed once Gina Rinehart sent a letter to her children on September 3 warning them the family trust was about to vest and that they would face bankruptcy if they didn't extend the vesting date.
In her legal defence, Rinehart claims: "None of the plaintiffs has the requisite capacity or skill, nor the knowledge, experience, judgment or responsible work ethic to administer a trust in the nature of the trust in particular as part of the growing HPPL Group."
In court documents, Rinehart characterised her three elder children as slackers "manifestly unsuitable" to manage the trust fund set up by their grandfather.
The result of Rinehart's letter and ensuing emails from Newby culminated in a legal battle with three of the four children seeking to remove their mother as trustee, alleging she has acted "deceitfully" and with "gross dishonesty". (One of the children had to withdraw from the action earlier this year because of financial difficulties.)
In the lead-up to the trial, which has been set down for October 8, assuming it doesn't settle beforehand, numerous emails and documents have been released into court. In some emails Newby accuses Hancock of having a "very shallow" understanding of the tax system and "inner workings" of the Australian Taxation Office. He says, "remember what happened to Skase when he tried to escape being brought back to Australia when bankrupt". Hancock hit back with an email: "You are treading on interesting professional territory here. As CFO, and you are commenting on these trust issues, do you have sufficient professional indemnity insurance?"
The latest correspondence, filed earlier this week in the Supreme Court of NSW, includes extensive communications between PwC, the tax adviser providing advice to the Rinehart camp on the ramifications of the trust vesting. The emails are explosive.
The communications include a request from Newby to PwC to prepare two versions of its advice; one that removes any reference to the possibility that shares in the family company could be pre-capital gains tax. According to PwC's internal communications, this version, the so-called "sanitised" version was "for provision to the children".
In one email to PwC, Newby says: "I have marked requested amendments on the attached - would appreciate if you could treat this as the sanitised version." In another email, Newby requests the removal of the discussion of treatment if shares in HPPL were pre-CGT.
Internal PwC documents between two PwC managers state they were instructed to assume that the trust deed would result in "absolute entitlement" when the trust vests.
In another internal document there is a discussion by PwC about issuing a "non reliance" letter if their advice was provided to the children.
A spokeswoman for PwC declined to comment on a series of questions put to the accounting firm, including whether this letter was ever produced or signed by the children. "As this is a matter involving one of our clients and it is currently before the court it is not appropriate for us to comment," the spokeswoman said. Newby also did not respond to a list of questions sent to him.
Days after getting the "sanitised" advice, Newby wrote to Hancock on September 5, 2011, saying: "Your statement that CGT is triggered on transfer only is simplistic and incorrect. To put it simply a beneficiary cannot dictate when CGT is triggered - it is triggered when the tax legislation and the ATO (who administers the legislation) says it is. There is zero you or the trustee can do about that. Arguing with me or indeed your mother will not change this."
Newby signed off with the warning: "Just advise before you travel if you want to pay CGT and take the consequences, or if you want the trust to be extended." In other emails he says: "John, please do consider that Mrs Rinehart is advised by PwC, one of the big four firms ... You cannot take positions in tax based on incomplete information - the advice considers all the relevant matters."
Hancock later received a private binding ruling from the ATO that said no capital gains tax was payable by the beneficiaries.
The emails give an insight into the pressure the children were under days before the trust was due to vest, which they believed would give them financial independence. "PwC's advice confirms that upon vesting, each beneficiary would become liable to a substantial CGT liability on the value of the trust estate to which they become entitled, levied at the rate of 23.75 per cent for Australian beneficiaries," Rinehart told each of her children in a letter sent on September 3, 2011.
In the same letter Rinehart said she was trying to get permission from PwC to show each of her children the PwC letter of advice. "They are not willing for their advice to be copied and distributed," she wrote.
In an exclusive interview last week with Fairfax Media, Hancock said, "From the start I've said we are doing this [legal action] to carry out the intentions of my grandfather, and for fairness to everyone." He said that in 1992 he travelled from the US to Perth to visit Lang Hancock on his deathbed. "He told me, 'You've got to be strong as you will need to run everything one day.' "
The family trust, which controls almost 25 per cent of the family iron ore fortune, was set up in 1988 to pay for the "education, advancement and benefit" of Lang Hancock's grandchildren. When he died in 1992, his daughter Gina Rinehart was appointed trustee of the family trust.
As trustee, Rinehart had her children sign secret agreements that effectively gagged them from talking to the press or saying anything that would embarrass her or challenge her authority as head of the family trust. The deeds also required that all their disputes be settled confidentially and through arbitration, and that they had to enter pre-nuptial agreements to ensure ownership and control of their shares in Hancock Prospecting remained with Rinehart's lineal descendants or herself.
The stakes are high. The warring parties are in mediation in an attempt to reach an agreement before the trial begins. If mediation fails, the so-called "malicious and ill-advised" litigation Rinehart says she is defending will be on for all to see.
It was recently revealed that the family trust filed a tax return for the 2012 financial year and that Hancock and his sister Bianca had each been distributed $398,206 by way of their share of the income of the trust. However documents said neither party had received the funds from the trust. In a letter last June, Rinehart allegedly said she had the right to exercise a lien over those funds - or keep them - to "repay the costs she has incurred in defending herself against [the plaintiffs'] malicious and ill-advised litigation".