The ongoing dispute between members of the Rinehart/Hancock family over the conduct and control of the Hope Margaret Hancock Trust (Trust) continues to attract significant media coverage. That coverage is understandable given the dispute involves Australia's richest woman and a family trust worth a reported $5 billion.
However, 2 issues which appear to be at the centre of the dispute apply generally to all trusts no matter the size of the trust nor the identity of the trustee.
Ignoring for the time being the large number of preliminary arguments played out in the courts, including as to whether the proceedings should be able to be reported in public or as to whether the dispute should instead be dealt with by private arbitration, the primary dispute involves:
as yet untested claims that Gina Rinehart, as trustee of the Trust (Trustee):
- breached her duty to act honestly and in good faith;
- acted with gross dishonesty in her dealings with the Trust's beneficiaries; and
- acted deceitfully in her dealings with the Trust's beneficiaries; and
- particularly, a focus on the Trustee's alleged actions in:
- advising the beneficiaries they could be bankrupted upon the vesting of the Trust; and
- extending the Trust's vesting date without advising the beneficiaries.
All the matters central to the case are still before the courts. This ClearLaw article examines CGT and trustee duty issues generally, against the background of the case.
Vesting and CGT concerns
The Trust, established in 1988 to pay for the 'education, advancement and benefit' of Lang Hancock's grandchildren, was originally due to vest on 6 September 2011, being the 25th birthday of Ms Rinehart's youngest daughter, Ginia.
Central to the dispute is a letter purportedly sent by the Trustee to the beneficiaries dated 3 September 2011 (Vesting Letter). The Vesting Letter informed the beneficiaries that the Trust's tax advisors, PWC, had confirmed that upon the beneficiaries becoming absolutely entitled to a share of the Trust, each beneficiary would become exposed to a substantial Capital Gains Tax (CGT) liability.
Some attention has been paid to the claim that PWC, on the instructions of the Chief Financial Officer of Hancock Prospecting, prepared a version of its advice which deleted a note qualifying PWC's advice, which had allegedly been to the effect that PWC had not considered whether the shares could be considered pre – CGT assets. However, even without this qualification, the primary question of whether a vesting of the Trust would give rise to a CGT liability remains an issue.
The vesting of a discretionary trust will generally have the effect of making one or more of the trust's beneficiaries absolutely entitled to a share of the trust assets. This will trigger a disposal of the trust assets for CGT purposes which could result in the trustee making a capital gain.
The issue then becomes who must pay the tax on that gain? If a beneficiary is absolutely entitled to an asset then it ought to be regarded as being specifically entitled to the gain. This would mean that under the general rules dealing with the taxation of trusts, the beneficiary would be assessed on any resultant gain.
In the context of the Rinehart case, this would seem consistent with the assertions set out in the Vesting Letter. Press reports suggest John Hancock has an ATO ruling to the effect that if the trust vested, he would have no CGT liability: the basis for this is not clear, however, and this may turn on Mr Hancock's own circumstances, including issues concerning residency.
When does the Cleardocs Discretionary Trust vest?
Under the terms of the Cleardocs Discretionary Trust, the trust vests on the earlier of:
- 80 years from the date of the Trust's establishing deed; or
- the date the trustee, with the consent of the appointor (if any) determines the trust will vest.
Given some of the issues raised in the Rinehart/Hancock family trust dispute, trustees should consider carefully all the potential impacts of vesting if they are considering exercising the power to vest the trust early.
Often, if a trust is left to vest according to its terms – rather than prior to the vesting date by a determination of the trustee – the effect is that the assets may vest in beneficiaries, and in proportions, different from those which the trustee may have effected had the trustee turned their mind to it.
The overall message is that a trustee should plan appropriately for any vesting of trust property to ensure that distributions are made:
- to the intended beneficiaries; and
- in the most tax effective manner.
In the Rinehart/Hancock family dispute, the claimants are alleging the Trustee's conduct amounts to a breach of the Trustee's duties. This includes an alleged breach of the Trustee's duty to act 'honestly and in good faith' for the benefit of the beneficiaries, which the courts have referred to as a trustee's minimum duty.
Trustees are in a fiduciary relationship with beneficiaries, and accordingly the position of trustee involves significant duties, including to:
- acquaint himself or herself with the trust's terms;
- act in accordance with the trust's terms;
- preserve and protect the trust property; and
- act impartially between beneficiaries (this does not prevent a trustee exercising a discretion to select certain beneficiaries from amongst the eligible beneficiaries so long as the discretion is exercised in good faith and for the purposes of the trust).
As is the case in this dispute, a breach of a trustee's duties can lead to:
- an action to remove the trustee; and
- the trustee being held personally liable for any trust losses which result from the breach of duty.
As to removing a trustee, even if a trust deed does not include an express power to remove a trustee, all Australian courts have a supervisory role in respect of trusts and can remove and replace a trustee in performing that role.
As to a trustee's personal liability for breaches of trust, before determining whether or not to allege that a trustee will be personally liable for a loss of the trust, beneficiaries and trustees must consider the terms of the trust's deed. For example, it is completely acceptable for a trust's deed to prescribe that a trustee is not personally liable for innocent breaches of trust.
Notably the claimants in the Rinehart/Hancock family dispute have alleged the Trustee's breaches in this instance amount to dishonest and deceitful conduct.
What does the Cleardocs Discretionary Trust deed say?
The Cleardocs Discretionary Trust deed provides that the trustee is not liable for loss of the trust unless the loss arises from fraud, gross negligence or breach of trust.
Given the risks of personal liability for a breach of trust, and the range of 'minimum' duties which the law imposes upon all trustees, individuals should carefully consider appointments to act as trustees (or directors of corporate trustees) in view of these obligations and the likely activities of the trust.
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Tax and Revenue or General Commercial team.
More Cleardocs information on related topics
You can also read articles on a wide range of trusts topics, here.