Legal Tip 228: Trusts and Privacy or how to hide ownership of a brothel

Warning: This thread will contain content of a sexual nature. If you are offended by sex look away now.


Trusts are private arrangements between the trustee and the beneficiaries, as such they are a great way for affairs to be more private than usual. So how does this work?


Having a company act as trustee will mean that title to property will be in the trustee company’s name. This includes land titles, share titles, bank accounts, cars etc.

Land title records are publicly searchable so someone could run a person’s name through one of the many databases and find out what properties that person owns. Having a company as the owner will mean any properties held in the trust do not come to light – unless the person searching knows about the company. They could do this by running an ASIC search to find out what companies a person is director of, and/or shareholder of, and then running land titles searches on those companies. But this is another 2 steps and costs money.


A shy person may also have a different person act as director of the trustee company. A trustee can also hold shares for them so that they will not appear on the ASIC register or land titles office. But this will be difficult where personal guarantees are needed because it is unlikely that the director would want to give these guarantees unless they were getting a substantial benefit from the trust.


Example

Dudley runs a brothel through XXX Pty Ltd which leases the property from YYY Pty Ltd which owns the property, Dudley also owns and controls this company. The lease has high rent which makes the property positive geared. Along comes an eager buyer of the property who pays a premium for it based on the yield. The purchaser’s lawyer suggests he run a report on the tenant to see who is behind it. The purchaser doesn’t want to spend $50 or so and does not do this.

After settlement XXX Pty Ltd makes 2 rent payments and then goes into liquidation.

Mr Purchaser realises he has paid about $200,000 more than he should have for the property.


Example 2

Homer wants to buy Ned’s property next door, but since a breakdown in communications (over a lawnmower borrowed but never returned) Ned probably would not sell to Homer, or if he did, he would sell for much more than the property is worth.

Homer decides to form a company and to have his friend Barney act as director. Barney approaches Ned’s agent and has the company enter a contract to purchase. Unbeknownst to Ned this company is acting as trustee for Homer.

Homer can name himself directly on the transfer of land so that it settles in his own name, or the company could settle and then transfer title to Homer’s name. Both can be done without triggering stamp duty again.


Example 3

Mr X is a religious man, yet he is also a frequent attendee at the local brothel. He finds out it is for sale and would love to purchase it, but is worried about what the parishioners at his local church would say.

Mr X decides to set up a company as trustee of a trust and have that own the property. Mr X worries about people doing a director search and finding him, so he suggests to a fellow punter than he be director in exchange for 25% of the units in the unit trust. The friend will also hold 75% of the shares in the trustee company as bare trustee for Mr X.

Mr X is then completely removed from the public eye as all he is is a unit holder in a unit trust which he controls. His wife will not know the source of the trust’s funds, and neither will his accountant.

In addition, every time Mr X uses the services of the brothel he is gaining part of his payment back in the form of a trust distribution – this could even improve his ‘servicing’ (no pun intended).

 

Bookmarking for a friend.

 

Any risks the trustee of the bare trust acts improperly?

 

another pun i missed!

Yes

 

Ie while you can fairly effectively hide your identity via the trust relationship, the individual trustee is very important. Can this be mitigated by having trustee sign a power of attorney to the beneficiary?

 

In all trust relationships there is a risk, but if the trustee breaches their fiduciary duty they could be sued.

 

Since when have i been religious ?

 

I'm surprised my name hasn't been used in any of the examples. Shocked actually.

 

I think your name is hidden quite well...

 

Disguised ownership is common in a range of issues:

- Commercial sensitive auction acquisition eg Client in rental car industry seeks to buy a well known rental operators former off site Sydney facilities. Nominee Director who is under a power of attorney etc. In an example the two Directors were the accountant and the lawyer for the client. After successful bidding they were VERY upset. They sought orders to have the auction outcome void but court saw no concern.
- Boarding Houses / Brothels and other illegal ventures eg waste handling and chemicals etc, car re-birthing premises, cigarette, fuel, spirits and other duties crimes, drug importations and so forth etc. One of the most effective and risk averse strategies is DONT own the premises. A independent person rents premises who lacks knowledge. Often a stooge but not always - Can be an unsuspecting wife or parent etc
- Avoiding detection for potential offences that may be minor council breaches or serious criminal matters
- basic privacy concerns

While a trust may be effective for hiding parties the issue remains that the trustee may be compelled or penalised to produce information and the risk is enhanced with illegal actions. The trustee is liable but the other parties may be complicit or have conspired etc. I guess the extent of the issue needs to be considered. It wont matter whether a family trust election and a name beneficiary are real or fake or up to date when the entity is used as a front to import and distribute drugs. Like the Plutus Payroll issue the structure wont amount to a thing. Seen as a sham. The fingerprints of involvement will be on other things.

Whats important is distinguishing between what may be a crime and what may be a genuine attempt to seek privacy or be guarded.

Corporations Act can impose penalties upon a company or person so care must be taken with a registered entity. ASIC take a less than aggressive approach but have some safeguards which can cause problems. They can refuse an address that their data doesnt consider is a residence etc. Or a non-street or non-specific address eg Apartment 4, 100 George St Sydney when 100 George Street is a 20 level tower !!

In its simplest people argue privacy and seek to use an untrue address on the company registers which are searchable by public. This is fraught with peril as ASIC move towards a synchronisation of human identity with their records. Intended to identify fake addresses, non residential addresses or non-street addresses etc. And fake names...Yeah they exist. Soon to be enforced. Just as Australian Post "bar coded" addresses which assisted fake addresses ASIC are soon to link valid identifiers with their data. Unsure how that project is going but will be one hell of a job.

There are way eg serviced office address, other addresses eg parent etc. But these issues may soon end. Or be limited by ASIC rules that reject some addresses. eg NO PO BOXES. Cant use incomplete street address etc. ASIC seem to rely on Australian Post data. Even a wrong suburb name on a boundary gets rejected.

ATO does something like this with SMSFs. Its not discussed much but I found it when a client was removed from a smsf role. ATO synchs all trustee asic details with fund details and validates certain data. It can mean incapacity to rollover EITHER way as a client found.

 

My mention of brothels was just to add a bit of spice to an otherwise dry topic. Brothels are not illegal in NSW, and I am not sure, but think they are also not illegal in other states. I don't encourage their use, nor do I suggest they not be used.

 

some people lack a sense of humour

 

It's alright Datto,you could always just become a silent partner in the business model and get more bang for your invested interest..

 

And it may also depend on which side of the, um, transaction one happens to be. Just saying.

 

Cutting the neighbour's grass requires little investment but buying a commercial property will leave a little more exposed.

 

Oh how appropriate Girls on the Avenue by Dick Clap (aka Richard Clapton).







"We used to go down to the beach at night.........Deep water I'm caught up in its flow"

 

Could you then claim the costs incurred as a tax deduction for ‘market research?’

 

Many councils in NSW have recently come under fire in media for engaging contractors (private investigators) to poke around this issue The words "happy ending" went to print in reports to council.

 

Come on!

 

Oh dear. Given the subject matter your spelling is not quite right there.