In the life that the Honorable Dyson Heydon AC QC had before before he became Commissioner heading the Abbott Government’s Royal Commission into trade union governance and corruption, way before he was a High Court judge, he provided some strategic advice on Rupert Murdoch’s family finances. His theme was filial devotion.
It’s just a brief cameo from a complicated saga in which Rupert Murdoch decided he should pay compensation for something or other to his mother, Dame Elisabeth, who then gave most of it back to Rupert. Naturally this act of charity was all tax free. And, as the courts subsequently found, all totally legit.
To be clear, there’s nothing at all questionable in Heydon’s advice. It was a technical legal question. He gave the right answer, the courts found. His first advice was that Rupert had breached his duty as trustee by not investing in other companies except News Corporation. An actuary then gave advice that Dame Elisabeth had actually done much better as a result of investing solely in News Corp, because News shares had gone like a bomb.
Heydon gave a second advice that even though the outcome was better for Dame Elisabeth, it was still the wrong thing to do and there was “a need to hold fiduciaries strictly to their duty”. So even though Dame Elisabeth was wealthier as a result, it was appropriate for Rupert to pay his mother $85 million compensation.
Rupert was as always the model of filial devotion.
Australian Financial Review March 6 2008
It began with a call in June 1994 from a New York tax lawyer concerned that Dame Elisabeth Murdoch was not receiving a fair return from the family trusts administered by her son. Rupert Murdoch needed to put things right.
It ended six months later with an $85 million payout, most of it in US dollars, in the hands of Dame Elisabeth’s son. It was all very tax effective – at least for Mr Murdoch.
A month after her 99th birthday, Dame Elisabeth’s lawyers were before the Federal Court of Appeal in Sydney yesterday appealing against a tax assessment from that payout nearly 14 years ago.
The Australian Taxation Office has ruled the $85 million was taxable income. While no figure for the tax assessment was given, with the top marginal rate of tax plus an interest bill over more than a decade, the total is almost certainly much more than $100 million.
It was, as both sides of the bar table conceded, an unusual case.
Dame Elisabeth has a lifetime interest in the income from four trusts set up by her late husband, Keith Murdoch, which owned about 8 per cent of Cruden Investments, the family company that held the Murdochs’ shares in News Corporation.
In June 1994, the Murdochs’ Australian lawyer, John Atanaskovic, sought advice from Dyson Heydon, QC, (now High Court Justice Heydon) after a call from US lawyers. Mr Atanaskovic suggested that by restricting the trusts’ investments to News shares which paid low dividends, the trustee, Rupert Murdoch, had shortchanged his mother, who would have earned more income from blue-chip stocks.
If she had a claim under Australian law, “Rupert would be obligated to . . . correct the situation by making a distribution to Dame Elisabeth”, wrote Ira S. Sheinfeld, a tax partner at New York firm Squadron Ellenoff, which acted for News. Significantly, a payout by the trustees “to bring the trust into compliance with Australian law would not be construed to be a gift made by Rupert under United States law”. Heydon’s advice concurred, noting that “it may be argued that Mr Murdoch was in a position of influence over his elderly mother”.
But a report by actuary Peter Bennett of Wyatt Company found that although News dividends were low, the many share splits meant that Dame Elisabeth had done far better than she would have from a blue-chip portfolio.
In a second opinion, Mr Heydon now argued that even though Dame Elisabeth’s returns had been very high, there was still “a need to hold fiduciaries strictly to their duty”.
The trustee, her son, had followed a high-risk strategy by investing only in News, and her return had not been commensurate with that risk. She was entitled to share Rupert’s return from the rise in value of the News shares he would inherit – though the position here was “not without controversy”, Mr Heydon said.
Mr Bennett calculated her rightful share came to $82 million from two of the trusts, and $193 million from the other two, totalling $275 million. Instead, Dame Elisabeth signed a deed of release for $85 million.
This was not a payment in return for lost income, which would be taxable, Tom Bathurst, QC, for Dame Elisabeth, told the court, but a settlement to give up the right to take legal action against the trustee. This was a capital payment, which sidestepped tax in Australia and the US.
Anthony Slater, QC, for the ATO, said the exchange began with Mr Sheinfeld’s “looking for some money” which did not attract gift duty in the US. “There is no question of sham” about the transaction, he said, but the payout was tied directly to lost income.
On October 26, 1994, Cruden approved a partial capital repayment of $85 million. Mr Atanaskovic told the ATO that the day the money was paid, one-third (about $28 million) went to Dame Elisabeth, who gave it away to family members and charities, and the rest (about $57 million), was converted to foreign currency “for the purpose of making a gift to Mr K. R. Murdoch”.
The court reserved its decision.
[nb But not for long. The Murdochs won the case]