Capital Works Fund Investment in New South Wales

Investing your strata funds is not a new proposition. Most Owners Corporations have been using primary forms of investment, usually, term deposits, for their long term Capital Works Funds for decades.

The more recent phenomenon of record low returns on term deposits and cash accounts has brought questions about the suitability of these historical solutions to the attention of strata financial controllers nationwide. The question now remains, what other means of investment is allowed under the New South Wales legislation?

NSW Strata Legislation examined

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 & 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

Further considerations

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!

You may also find that your Owners Corporation does not have a trust structure arranged or setup. In this case you can also look to invest as a Corporate style account, with a number of nominated signatories in lieu of directors in a corporate trustee. These may be the key members of your committee, and it is advisable to nominate several people that can be contacted or oversee the account in the event of long holidays or periods of absence from committee duties.

Strata Guardian has sought legal advice from a respected national Strata Lawyer on investing with us in New South Wales, along with a template Committee motion we can share with you. Please be in touch to receive a free copy.

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.

Tim Fuller is the Head of Wealth at Strata Guardian. Using over a decade of experience providing sound financial advice to everyday Australians, he shares a passion for simple and effective investments that give clients the confidence they can achieve their goals.