The documents MinRes directors didn’t see
Magic money, a disappearing depreciation claim – Chris Ellison’s excellent offshore adventure skips a few details.
The Mineral Resources board’s latest attempt to cauterise the company’s governance crisis underlines the timing and disclosure challenges facing its directors.
Are they satisfied with Ellison’s level of disclosure, and the extent of his co-operation with the board investigation involving Herbert Smith Freehills?
That is not the only question.
MinRes founder Chris Ellison: From the moment a Sydney accountant made the contact with the ATO in 2019, excess depreciation claims were discussed. Michaela Pollock
By the board’s own account, Mr Ellison took four years to tell directors that he had been negotiating a settlement with the Australian Tax Office over a decade-long tax evasion scheme involving former chairman Peter Wade and three founding executives. This was admitted in a reply to the ASX’s questions on Tuesday.
A disappearing depreciation claim is at the heart of conflicting evidence about the reach of the alleged scheme, which involved using a British Virgin Islands company, Far East Equipment Holdings Ltd, to buy used machinery resold to MinRes for a profit.
That raises questions not just about how MinRes officers could be so oblivious to the scheme’s existence, but also whether the ATO agreed to accept a settlement which masked how a listed company was enmeshed in what directors still call its chief executive’s “private tax affairs”.
Mr Ellison’s tax advisers approached the ATO in December 2019 with an offer to disclose the scheme.
The offer to self-report, at a time when the five execs feared the scheme was about to be revealed, was conditional on an 80 per cent reduction in any penalties and the ATO’s agreement not to share the information with regulators such as ASIC and the Federal Police.
MinRes says Ellison settled with the ATO by May 2023. But Ellison only confirmed his deal with the ATO to the MinRes board last November, after the board heard about it from other sources. His account skips a few details.
The obvious first step that directors could have taken when they learned of the offshore scheme was to ask for all documents supplied to the ATO and all correspondence in the settlement.
It appears from Tuesday’s statement that directors did not receive this, nor is it clear whether they asked.
An ATO analysis prepared earlier this year, based on documentation supplied by Mr Ellison’s advisers, concluded that from June 2003 to June 2013, Far East received – almost entirely from MinRes companies – payments of $11.5 million plus $US1.38 million.
From this, the ATO calculated that in the first three years after MinRes floated, Far East earned $1.82 million net profit in fiscal 2007; $1.9 million in 2008; and $2.9 million in 2009, a total $6.34 million.
Remarkably, MinRes claims it paid only $3.8 million to Far East during this time. What the statement doesn’t explain is how Far East earned more than what MinRes says it actually paid.
In fact, Far East had its best year in 2009 when it received precisely zero from MinRes, yet still notched up a $2.9 million profit.
MinRes was paying Far East well above market values for machinery, on which it could make an accelerated depreciation claim.
For example, with a crusher bought for $250,000 and then resold for $2 million, the depreciation claim applies to the $2 million.
But in its summary produced this year, the ATO concludes that Far East was a so-called controlled foreign company. As such, MinRes could not claim depreciation referencing the inflated price.
Inevitably, the Far East scheme left MinRes with a depreciation issue.
From the moment that Sydney accountant Chris Batten made the first contact with the ATO about a voluntary disclosure on December 16, 2019, excess depreciation claims were discussed.
On February 4, 2020, the ATO made it clear the deal was not just “a finding of evasion” by the five men who realised $10 million in income; but also “the excess depreciation claims of companies in relation to the mining equipment acquired from Hong Kong”.
This wasn’t Far East. It was MinRes making the excess depreciation claims.
After the December 2019 meeting, an Ellison adviser even noted that the ATO officer “confirmed that he is willing to allow Mr Ellison to pay the tax debt arising from the excess depreciation claim”.
MinRes denies this: “Mr Ellison did not agree to repay depreciation claims on behalf of MIN, and no such amounts were repaid as part of, or in connection with, the voluntary disclosure of his private tax affairs,” the company told the ASX.
Tax disputes of this sort are typically settled with an umbrella payment which can include dropping tax claims.
It’s possible that MinRes’ tax shortfall from the depreciation claims was settled in May 2023 without any action by the company – or even any evidence in its accounts.
And none of this, the board decided repeatedly since 2022 – when Far East surfaced in a whistleblower report – was worth sharing with shareholders.
MinRes defends handling of Chris Ellison tax scandal claims
