I was reading an article recently about how a property manager could make some money from the tradespeople who serviced the rent roll, and I could not help but think that the advice offered was fraught with danger.

It is probable that when the average Australian property manager hears the term "secret commissions", he or she thinks of some Third World dictator creaming a few hundred million dollars off the top of his country's latest order of second hand battle-tanks and salting it away in his Swiss bank account. At the same time as the tut - tutting about the actions of the dictator are being expressed, the manager may also be accepting an undeclared kick-back from the plumber who handles all the repairs.

Oh, I hope not!

You see, you are talking about exactly the same crime --- only a difference in degree! Whether you have received a secret hundred million dollars from the battle-tank vendor, or a year's worth of undeclared free plumbing work at your own house, you are guilty of receiving a secret commission.

Secret commissions in the agency and management business are often poorly understood, and if understood, are often trivialised. It is timely to remind everyone that secret commissions are covered by the Criminal Code, and are not just a civil matter that may result in someone suing you. In other words, they could result not just in a fine, but a jail term, a criminal conviction and loss of licence and livelihood. This should concentrate our minds wonderfully on what we may and may not do.

So what exactly is a secret commission? The scope of the law is broader than just its application to the real estate industry,

but let's look at the relationship an Agent (property manager or licencee) has with the Principal (landlord or seller). We have what is called a "fiduciary" duty to our principal. This simply means we must put the interests of our principal above our own interests at all times. When we accept, without the knowledge and consent of our principal, any benefit over and above what we are legally entitled to receive, we are receiving a secret commission. Let's say that while acting as manager of a property for a landlord, we receive a fee or other benefit from the person carrying out maintenance on the property without the landlord's knowledge and consent --- we have committed an offence.

It is not the fact that you have received a commission, kick-back or benefit that cause the problem. It is the lack of knowledge by, and approval of, the principal that causes the fraud. If your principal KNOWS you are going to receive some benefit from the supplier or tradesman, and understands that your referral or recommendation must be viewed in the light of that benefit, it is no longer a secret commission. Of course, the principal may no longer accept your recommendation and request you obtain other quotes. That is his right as a fully informed participant in the transaction.

Another situation where the law is being broken regularly is that of property managers who do not have a sales function as part of their business e.g. standalone specialty property managers and resident on-site managers. Such managers may be approached by an owner about selling the investment property. Often the manager will have an "arrangement" with a

favourite real estate agent by which the agent is recommended in return for a percentage of the sales commission or perhaps a fixed sum of $1000 or $2000 or whatever. In most cases, the owner of the property is not aware of this cosy side deal. If you are looking for a better example of an illegal secret commission, I can't think of one! Should this arrangement eventually come to the attention of the seller, not only would the long arm of the law be involved, the agent would have to repay all the commission, and you would have to repay your secret commission. For managers without a full real estate agents licence e.g. most on-site managers, there is a double jeopardy. In most states it is illegal for a person who does not hold the necessary real estate sales qualifications to receive commission from the sale of property. The so-called "referral" fee is just that --- commission on the sale of property! It is therefore illegal on two counts.

Government regulators are taking a keen interest in the topic of full disclosure to principals. That is why disclosure is required in both the Form 20a and Form 27c in Queensland. These forms must be treated with the utmost care, and all benefits must be disclosed. Since the declaration on your appointment to act was probably completed some time ago, it is timely for you to sit down and consider this question, "Am I receiving any benefit from my involvement with my client's properties that my client is not aware of?"

If the answer is "Yes", be it so small a thing as free carpet-shampooing at the office and your house, you are breaking the law, so you must either stop receiving the benefit or declare it.

Two important expansions for the RAAS Group are now in place. Firstly, we welcome well known North Queensland management rights identities Andrew & Liz Yiannoullou to the RAAS RIGHTS team. Andrew & Liz will be handling management rights sales for RAAS in

North Queensland from their base in Cairns. For all listing or sales enquiries in that beautiful part of the world contact Andrew on 0419 794 692 or Liz on 0409 698 195. Their email contact is yanlou@raas.com.au. Secondly, our new support office on the Gold Coast is up

and running. Please make a note of the details. The address is Suite 6, 211 Ron Penhaligon Way Robina Q 4226. The phone number is 07 5593 0007 and the mobile for our Gold Coast Office Administrator, Jodi Harrison, is 0412 749 994. Email address is jodi@raas.com.au.

By Frank Higginson - Partner Hynes Lawyers (frank.higginson@hyneslawyers.com.au)

One of the 'joys' of the management rights industry is that there are no two identical management rights businesses. Each business has its own idiosyncrasies, whether they relate to the income streams, types of units, forms of management agreements and the like.

More importantly though are the individual personalities that form part of the scheme. Bodies corporate are also known as 'community' title schemes, although the definition of 'community' from scheme to scheme varies quite widely.

We act for a resident manager of a large scheme who, for all intents and purposes, had a good relationship with his committee.

He was called to an informal meeting with the chairperson on short notice. Nothing otherwise appearing as untoward, he walked into the chairman's lot to be confronted by five committee members who immediately accused him

of breaches of the caretaking agreement and implied criminal conduct. A star chamber by another name.

After being bombarded for a period the committee produced a one page document saying that it would be easier for everyone if he just agreed to walk away, and 'here was the deed to do that'.

Our client signed it, then came to his senses that afternoon.

A legal battle is likely to follow, starting with the legal ability of the committee to purportedly agree to such a deed.

What are the morals of this story?

• No matter how your relationship may seem, you never can be 100% sure of it in a committee context - people change views for all sort of reasons; and
• Never ever sign a legal document without proper advice.

A 'helpful' committee decided to start doing the resident manager's jobs for him.

Walls were touched up, pavers repaired, contractors instructed. Some larger jobs (which the resident manager would ordinarily supervise) were also undertaken by the committee, such as the painting of recreation areas.

In one context this sort of assistance could be welcome, but in another it caused more headaches than not, as the work was done on the cheap and by inexperienced and unqualified tradespeople.

The chairman was the self appointed leader of the troupe of workers and a few weeks ago tinkered with the contract gardeners mulching equipment without telling him. When the gardener later started back into his work he lost his pinkie to the unsafe machine.

Suffice to say the committee have stopped helping and there is without doubt a large compensation claim coming against the body corporate for the interference.

The moral this time?

Stick to your role - going beyond that will only lead to problems.

And people say the law is boring...

By Tony Rossiter - Holmans Accounting & Taxation (trossiter@holmans.com.au)

For many people entering the Management Rights Industry they are becoming Small Business Owners for the first time. As a Small Business Owner there can be many rewards and benefits, but it also means you have additional obligations to consider.

Quite often we find people entering the Management Rights Industry for the first time tend to adopt the systems and processes of the previous owner, taking the view that, "if the previous owner did it that way, well it must be right". Not so! Often new managers have inherited poor business practices which have been handed down from one manager to the next over many years. In extreme cases these practices may in fact be illegal and lead to significant fines and penalties.

Whether you are about to enter Management Rights for the first time or are a seasoned veteran, you should continually question whether the business practices you have adopted are the most appropriate for your individual circumstances.

There are a range of areas that may need to be reviewed and improved within your business. To help you get started ask yourself the following questions?

• Do I have the correct business structures in place to help minimise my tax obligations?
• Do I have the right risk insurance in place?
• Am I meeting all my obligations under the Caretaking Agreement?
• Am I administering the Trust Account correctly?
• Am I accounting for advertising funds correctly?
• When was the last time I reviewed charges and tariffs to owners and guests?
• Is there an opportunity to have my Body Corporate Salary reviewed?
• Am I meeting my obligations as an employer?

It is important to determine the status of workers as Small Business Owners have different tax obligations under the Pay As You Go (PAYG) System, depending on whether you engage a worker as an employee or as an independent contractor.

There are a number of factors to consider in determining whether a worker is an employee or an independent contractor, with no one factor necessarily conclusive. A Small Business Owner must examine all the facts in each case. The main factors to consider in determining whether a worker is an employee or an independent contractor are outlined below.

Generally a worker is an employee if they:

• are paid for their time worked and receive paid leave (for example - sick, annual or long service leave)
• are not responsible for providing the materials and/or equipment required to perform their duties
• work hours set by an agreement or an award
• take no commercial risks; and
• cannot make a profit or loss from the work performed

If a worker is an employee, the Small Business Owner must withhold an amount from any salary, wages, commissions, bonuses or allowances they pay to the employee in accordance with the taxation rates published by the ATO, along with information provided by the employee on a Tax File Number Declaration (and Withholding Declaration if applicable).

An independent contract is an entity (such as an individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor:

• is paid for results achieved
• provides all or most of the necessary materials and/or equipment to complete the work
• is free to delegate work to other entities
• provides services to the general public and other businesses
• is free to accept or refuse work; and
• is in a position to make a profit or loss

If a worker is an independent contractor, a Small Business Owner is required to withhold an amount from the payments only where the contractor:

• has entered into a voluntary agreement with the Small Business Owner to have amounts withheld
• provides their work or services for a client of the Small Business Owner under a labour hire arrangement; or
• has not quoted their Australian Business Number (ABN) to the Small Business Owner

In Management Rights, typically workers are engaged for cleaning services, office duties, grounds staff and/or maintenance services.

As a Small Business Owner, you should review your current arrangements with your workers to ensure you are correctly classifying them and paying them appropriately. There are resources that can help you ensure you are meeting your obligations and avoid fines and penalties. If in doubt contact an industry specialist to help guide you through the myriad of issues.

By taking the time to ensure you are meeting all your obligations as a Small Business Owner, you stand a far greater chance of leaving your business in better shape than when you took over - thus you are more likely to withstanding the scrutiny of a purchaser's advisor and maximise your sale proceeds. Don't simple take for granted that what you have inherited is the way it should be.

If you would like to comment on anything you have read in The RAAS Report, please write to PO Box 1325, Sunnybank Hills, Qld 4109 or send an email to mike@raas.com.au.

www.raasrights.com.au • www.raas.com.au