This article is about investments in NSW and achieving a better return for your capital works fund.
Question: Can we move part of our capital works fund into a term deposit or shares to get a better return on investment?
We recently asked our strata manager about whether we should move part of our capital works fund into a term deposit to get a better interest rate.
The bank had offered 0.045% p.a. interest in a term deposit to a strata scheme, so the strata manager’s view was that it wasn’t worth moving a portion of the capital works into a term deposit until the interest rates improve.
I’ve seen that it is possible for a Queensland body corporate to invest part of their sinking fund into shares or managed funds.
If a prudent low-risk investment e.g. an ASX-listed ETF with a dividend stream could be found and agreed upon, could a NSW-based strata scheme make such an investment?
What hoops would the strata committee and strata manager have to jump through to achieve this?
Answer: What options are allowed, and how do we go about it?
It’s a sad state of affairs when the only available solution to a near-zero (or zero!) cash rate is a term deposit that yields 0.045% p.a. This is due to a host of factors we haven’t got time to dive into today. Still, unfortunately, it is the situation that we all now find ourselves in.
There are two components to answering this query being; what other options are allowed, and how do we go about it?
Allowable investment options for NSW
Section 75(1) of the SSMA 2015 (NSW) forwards the allowable options for investment of
administrative or capital works funds to any manner permitted by section 4 of the Trustee Regulations 2020 (NSW). This section offers guidelines that draw a line in the sand at trusts with a value of the funds of $50,000 or below. For this part, investment choice is limited to Government debentures and securities, or bonds (both at a Commonwealth and State/Territory level) and, as we all know, interest-bearing deposits (cash accounts) and term deposits at a host of authorised deposit-taking institutions (major banks). Whilst government bonds do offer a point of difference, they share similarities in yield with term deposits and may not be worth exploring at this point.
So, what about trusts with a value of funds above $50,000, such as well-established capital works funds? Thankfully this is where the investment palette broadens, but with a couple of significant caveats. Division 2 of Part 2 of the Trustee Act 1925 (NSW) offers a series of confirmations and considerations when working through some alternatives for your longer-term savings as a trustee:
- An initial review of your trust deed is required to ensure no limitation on the allowable investments above and beyond what is prescribed in the Act.
- Notwithstanding the above, the ability to invest in ‘any form of investment’ and at any time vary any investment is then permissible.
- Exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of another person.
- Implement annual performance reviews of the trust investments
- Provisions to seek advice and use trust capital to pay for this advice
Like all well-considered investments, Section 14C of the above Act details a list of further
factors that strata committees should address to ensure the validity of the decision when exercising the power of the investment. Here are a few points of note, but not all of them:
- The purpose of the trust and circumstances of the beneficiaries
- The desirability of diversifying the trust’s investments
- The nature of and accompanying risks of the proposed investment
- The potential for capital appreciation, along with the prospect of capital loss
- The length of the term of the proposed investment against the probable duration of the trust
- Consideration of tax liabilities, likely income return and timing of this income
- The liquidity and marketability (i.e. ability to sell) of the investment
- Costs and fees of the investment – are they reasonable?
- The likelihood of inflation affecting the value of the trust and its investment
Going about it
Suppose you feel that your trust has met the above criteria (or have had it confirmed through legal advice, highly recommended), then great! All that is left is a committee resolution approving the decision, and the world of broader investments awaits. So, where to start?
Market linked investments like exchange-traded funds (ETF’s) are a terrific and often cost-effective way to achieve sound diversification through a simple transaction. The rub is which ones to purchase, in what amounts, and then who oversees the management. Herein lies the danger, as it is easy to see a strata committee member (or members) now be knighted as the fund manager, a job with a unique set of skills that brings with it some serious responsibility.
We are happy to say that help is at hand, however, so if you feel you would like to explore some options, feel free to reach out to Strata Guardian and see if our investment service can help your strata savings diversify away from negative real returns and the prospect of rising strata levies.
This post appears in the October 2021 edition of The NSW Strata Magazine.
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This article is for reference purposes only and is not intended to be a comprehensive review of the developments in the law and practice or to cover all aspects of the subject matter. It does not constitute legal or other advice and should not be relied upon this way. Readers should take legal or other advice before applying the information contained in this publication.
- NSW: What Makes a Good Capital Works Fund Forecast?
- NSW: Q&A Owners Corporation Committee Decisions
- NSW: Q&A Defamation in Owners Corporations Communication
Looking for strata information concerning your state? For state-specific strata information, take a look here.
Are you not sure about some of the strata terms used in this article? Take a look at our NSW Strata Glossary to help with your understanding.