NSW: Q&A Can we get a better return on our Capital Works Fund?

This article is about investments in NSW and achieving a better return for your capital works fund.

Table of Contents:

• QUESTION: Can we instruct our managing agent to transfer all or part of our capital works fund to a term deposit where it will remain on call but generate much higher interest?
• QUESTION: Our strata manager organised a 1 year term deposit. If we change strata managers, will the term deposit be closed or transferred to the new manager?
• QUESTION: As stewards of surplus strata funds, does the strata committee have a responsibility to the Owners Corporation to invest the surplus wisely?
• QUESTION: Can we move part of our capital works fund into a term deposit or shares to get a better return on investment?

Question: Can we instruct our managing agent to transfer all or part of our capital works fund to a term deposit where it will remain on call but generate much higher interest?

Our owners corporation chooses to accumulate assets in our capital works fund (CWF) to cover unexpected eventualities and fund major works without always approaching owners for special levies. We currently have a significant amount put away in a separate savings account administered by our managing agents. It earns minimal interest.

Can we instruct our managing agent to transfer all or part of our CWF reserves to a term deposit at the bank, where it will remain on call but generate much higher interest?

Answer: For Australian lot owners and residents, the benefits of better returns and bank diversification are hard to ignore.

As a committee member, you are responsible for decisions about the owners corporation’s assets. Due to this, where the future capital resides, the expected returns and any risks involved need to be well considered. It is prudent to obtain options for review before deciding.

Most managing agents will have a ‘backbone’ financial institution offering streamlined payment systems that help to ease the administrative burden of managing your owners corporation (OC). As a result, it often means that your capital works fund resides with the same bank.

As the ultimate owners of the capital, you have the right to direct this capital to a higher-yielding environment or another institution if you wish. Some states have ‘prescribed lists’ of financial institutions for strata-related funds (NSW primarily), which can narrow the options of better-returning products like term deposits.

A further consideration is that the strata management software used by the management company may often limit your options, as they are often aligned or configured to use only a few, or usually just one, financial institution. This issue is more of a ‘manager’ problem than an OC one. Depending on the terms involved (i.e. 12 months or more), good communication between the financial institutions and the manager can overcome this.

In our experience, several reputable financial institutions are more than willing to help out owners, corporations and body corporates. For Australian lot owners and residents, the benefits of better returns and bank diversification are hard to ignore.

Tim Fuller
Strata Guardian
E: [email protected]
P: 1300 482 736

This post appears in the June 2023 edition of The NSW Strata Magazine.

Question: Our strata manager organised a 1 year term deposit. If we change strata managers, will the term deposit be closed or transferred to the new manager?

Under our instruction, our strata manager placed our sinking fund in a 1-year term deposit with a bank. If we switch to a different strata manager, will our term deposit be closed prematurely as a part of the handover to our new strata manager? Or can our term deposit be kept with the bank?

Answer: The answer can lie in the detail of the term deposit ownership, but several options are usually available to the committee.

Given the perceived costs of breaking terms, committees can feel limited in the lengths of terms they may wish to consider. Especially if they are considering changing agents/managers!

The answer can lie in the detail of the term deposit ownership, but several options are usually available to the committee.

If the term deposit is in the name of the owners corporation and not the strata manager, with their own bank account which will not change with the manager, no change is needed.

If the term deposit has been struck with a bank using the owners corporation as the owner of the funds, but using an strata management trust account, then you simply need to update the details of the bank account where the money is redeposited at the end of the term. Typically a simple administrative task.

In the more likely event that the term deposit has been placed through the strata manager in trust, there is, depending on the bank, the ability to update the ownership to maintain the term. This will usually require that the new agent be identified to the bank (under the AML/CTF Act 2006) and supplied with the usual strata management contract that links the agent with the owners corporation, along with a letter that explains the situation. Exploring the bank’s flexibility would be worthwhile if a committee feels this issue may occur.

Finally, there is always the ability to provide notice, typically 31 days, to the bank to have the term broken and the capital (and residual interest) returned early. The residual interest may have some penalty deductions. The interesting point here is that we have seen penalties be waived or reduced by some banks that value strata capital. Sometimes all it takes is a phone call to the right person.

Tim Fuller
Strata Guardian
E: [email protected]
P: 1300 482 736

This post appears in the February 2023 edition of The NSW Strata Magazine.

Question: As stewards of surplus strata funds, does the strata committee have a responsibility to the Owners Corporation to invest the surplus wisely?

Does the strata committee have a responsibility to the Owners Corporation, as stewards of surplus strata funds, to invest the surplus wisely, balancing risk and return, for the benefit of all owners?

We have over $4000,000 in non-interest-bearing bank accounts. Interest earning deposits in Banks are guaranteed by the Commonwealth government up to $250,000 per lender. With rising interest rates it doesn’t make sense to have all funds available at call not earning interest income.

The easier option to avoid criticism from conservative committee members and owners is to not avoid any risk by having funds at call in the event of a catastrophe.

I think there is an obligation on committee members to achieve the best outcome for all owners.

Are there any strata rules and regulations that provide guidance to committee members?

Answer: Committee members of the Owners Corporations have a duty to ensure that the capital saved by owners is managed prudently.

As you have excellently put it, as ‘stewards’, committee members of the Owners Corporations have a duty to ensure that the capital saved by owners is managed prudently.

For NSW, there are specific directives in Div 2 of the Trustee Act 1925 that decisions are made that “exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of another person”, for example. You find similar obligations in comparable legislation for other states and territories.

In practice, this means choosing the suitable investment mix for the required time horizons of expenditure. Holding large balances for long periods in non-interest-bearing accounts should be viewed as detrimental because of inflation effects. Similarly, investing in cryptocurrency is probably not the right path either!

Term deposits are a potential solution. Most are covered by the Financial Claims Scheme (FCS or ‘Govt Guarantee’) and offer reasonable rates of return over various term periods. There is very low capital risk and the ability to ‘break’ a term if necessary.

The cost of breaking a term is called a ‘prepayment adjustment’ and is usually a reduced interest calculation and an administrative fee, which is not ideal compared with holding to the full term. However, still, it should be acceptable to even the most conservative committee member in comparison with zero or little interest otherwise.

One consideration when allocating larger (greater than $250,000) balances is to keep in mind that you may need to consider several banks in the solution if full Financial Claims Scheme coverage is desired.

As a committee, allocating the funds can be substantiated by using a well-constructed maintenance plan to help alleviate individual responsibility and provide confidence in decisions. For longer-term savings, higher rates of return are in reach, knowing that in emergencies, money held in term deposits is generally available with 31 days’ notice.

Tim Fuller
Strata Guardian
E: [email protected]
P: 1300 482 736

This post appears in Strata News #593.

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.

Tim Fuller
Strata Guardian
E: [email protected]
P: 1300 482 736

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.

Related Articles

• NSW: What Makes a Good Capital Works Fund Forecast?
• NSW: Q&A Owners Corporation Committee Decisions
• NSW: Q&A Defamation in Owners Corporations Communication

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