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Investment of the Sinking Fund and the Prudent Person Rule

Body Corporates in Queensland - Investing with your money.

The Sinking Fund

A body corporate must establish and maintain a sinking fund[1] on account of anticipated capital expenses of a non-recurrent nature, such as repainting the building interior and exterior, and other one-off major repairs to common property.[2]

When using monies in the sinking fund, the body corporate must act reasonably in making decisions about the use of the fund.[3] Before any payment may be made from the sinking fund, the body corporate must receive either a written request for payment, or written evidence of payment (such as a receipt).[4]

Apart from this, the body corporate may invest any amount not immediately required for the purposes of the fund in the way a trustee may invest trust funds.[5] It should be noted that the body corporate is not a trustee: it’s just that the way the body corporate may invest trust funds must be done as if it were a trustee of those funds. This provision is specific to investment only, and the body corporate does not act like a trustee in any other respect.[6]

The Prudent Person Rule

The body corporate legislation does not set out any rules or guidelines as to any acceptable form of investment, or what the body corporate should take into account when investing. This is when the prudent person rule comes into play.

Historically the rule has been around since the mid-1800s and sets out standards that trustees must observe when investing trust monies. Trustees are to observe prudence, intelligence and discretion, must not act speculatively, and must take into account the safety of the capital to be invested.[7]

In Queensland, this rule is partly codified and found in sections 22, 23 and 24 of the Trusts Act 1973 (Qld) (Trusts Act). However, these are just the statutory rules. The general (non-statutory) law is preserved and if a trustee is not in the business or profession of investing moneys (such as a body corporate), then the person investing the funds must exercise the care, diligence and skill a prudent person of business would exercise in managing the affairs of another person.

The general law includes duties to obtain advice, exercise investment powers in the best interests of all present and future beneficiaries, and not to invest in speculative or hazardous investments. Section 24(1) of the Trusts Act 1973 (Qld) sets out a list of factors that a trustee may take into account. Paraphrased for the body corporate context, these factors include:

(a) the purposes of the [sinking fund] and the needs and circumstances of the [body corporate and lot owners];

(b) the desirability of diversifying investments;

(c) the nature of and risk associated with existing [sinking fund] investments;

(d) the need to maintain the real value of the capital or income of the [sinking fund];

(e) the risk of capital or income loss or depreciation;

(f) the potential for capital appreciation;

(g) the likely income return and the timing of income return;

(h) the length of the term of the proposed investment;

(i) the probable duration of the [sinking fund];

(j) the liquidity and marketability of the proposed investment during, and at the end of, the term of the proposed investment;

(k) the total value of the [sinking fund];

(l) the effect of the proposed investment for the tax liability of the [sinking fund];

(m) the likelihood of inflation affecting the value of the proposed investment [of the sinking fund];

(n) the cost (including commissions, fees, charges and duties payable) of making the proposed investment;

(o) the results of a review of existing [sinking fund] investments.

Further, under s 24(2), the trustee may obtain, and if obtained must consider, independent and impartial advice reasonably required for the investment of trust funds or the management of the investment from a person whom the trustee reasonably believes to be competent to give the advice.

With respect to the general law the case of Re Baker (decd) [1961] VR 641 is particularly relevant for investment in shares by a trustee. The court held that, for such an investment, a stockbroker should be retained to give advice, and that such an investment should be confined to shares in established and proven enterprises with an issued capital exceeding a certain amount, and that the companies in which the investment was to be made should have a proven record of declaring dividends.

This more stringent requirement is because the trustee must act in the best interests of the beneficiary. Here beneficiaries may be equated to lot owners in a body corporate complex. It also raises questions about conflicts of interest, as the trustee has the duty to disclose and avoid conflicts of interest.

What should a body corporate do when contemplating a novel investment?

Here a usual investment would be, say, investing sinking fund monies in a term deposit with a bank as opposed to using sinking fund monies to invest in shares in a private Company together with using other sinking fund monies to purchase shares in that private company where that company then purchases several lots in the body corporate complex. The latter would certainly be novel.

In those circumstances, there are serious questions about whether the body corporate can even make such a novel investment.

A body corporate cannot carry on a business unless it’s an investment,[8] and a body corporate cannot have an interest, either legal or equitable, in a lot in its own scheme unless it is a registered easement or for the purposes of creating common property or as a residence for a letting agent.[9] An ‘interest’ in land includes ‘a right, power or privilege over, or in relation to, the land’,[10] so there are very fine questions of law regarding whether the body corporate can even make such a novel investment.

This surely raises the question of what the prudent person rule would require. How can the prudent person rule be observed when making such a novel investment?

Under s 94 of the Trusts Act 1973 (Qld), the Supreme Court of Queensland ( the Court) has an ‘expediency’ jurisdiction to make orders on application by a trustee to make an investment if it would be in the best interests of the beneficiaries to do so, but would otherwise be inexpedient without the Court’s assistance.

This begs the question why should the proponents of a novel investment not seek the assistance of the Court? If there is any uncertainty, the body corporate should seek appropriate legal advice and then direction from the Court.[11]

The security of term deposits

The Financial Claims Scheme established by the Australian Federal Government in 2008 protects monies on term deposits held by certain authorised deposit-taking institutions in Australia (ADIs) but only to the extent of $250,000 per account holder per ADI. A body corporate, to be protected, would need to have no more than $250,000 deposited with any one ADI to have the benefit of the protection of the scheme. If a body corporate had a sinking fund of $5,000,000, it would need to spread its deposits over twenty (20) ADIs, but that would not be a problem as there are over 70 ADIs in Australia. To put it another way, if there are only 70 ADIs in Australia, $17,500,000 of sinking fund monies could potentially be protected by the scheme by investing in term deposits.

Monies invested in shares in companies or the acquisition of shares in companies are not protected by the Financial Claims Scheme. This is all the more reason for a body corporate contemplating such an investment to first seek advice on whether s94 of the Trusts Act 1973 (Qld) would apply and if so to then make an appropriate application to the Supreme Court.

It would seem prudent for the body corporate to seek advice and the assistance of the Supreme Court where it did not do so before making the investment. This would be even more reason to do so where elements of the prudent person rule appears not to be complied with in the making of the investment, such as where the company to be invested in does not have a proven successful financial track record, and is in fact created for the sole purpose of the investment scheme in the body corporate.

Legality of providing notice via an online portal

These days, it is often the case that notices and records are not actually sent to people. Instead, people are often sent a link to some form of cloud storage, or are told they can access a notice through an online portal. This does not constitute lawful notice.

The Supreme Court of Queensland considered the meaning of service and giving notice in Conveyor & General Engineering Pty Ltd v Basetec Services Pty Ltd [2014] QSC 30. This case concerned a party giving notice under a contract, except they simply sent a link to Dropbox. The Supreme Court held that service occurs when the person becomes aware of the contents of the document to be served. Simply sending someone a link where a person can access the file is not enough unless and until the person actually accesses the document.

It follows that, if a body corporate or body corporate manager is required to give notice to people, it is not enough to simply provide a link to cloud storage or by telling them to access a document on the portal. The document must actually be sent to the person, whether by personal delivery, mail, or email. This approach has been taken in Palais [2018] QBCCMCmr 565, [78] where notices of meetings were posted on a portal. There the adjudicator said ‘I am satisfied that directing owners to log in to a community website programme or portal is not sufficient notice of a meeting, or sufficient sending of a copy of the minutes as required by the governing legislation.’

Further, the obligation to provide copies of records or allow inspection is not satisfied by referring the owner to an online portal or community hub. In Drift Palm Cove [2020] QBCCMCmr 477, [25] the adjudicator said ‘The fact that some or all of the records may be available to some or all owners through an online portal such as the ‘community hub’ does not absolve the body corporate of its obligation to provide copies of records and/or permit an inspection of the records in response to a request made under section 205 of the Act.’

Neil S. Hope LLM(Comm), LLM

Principal Solicitor

Body Corporate Law Queensland

Further reading

Castlebrook [2000] QBCCMCmr 654. Refers to the authority that a body corporate ‘may’ invest funds, meaning there is no duty to do so. It is discretionary.

21 Sunrise Boulevard [2004] QBCCMCmr 610. Here the adjudicator refers to the provision to invest and says ‘If the body corporate wishes to invest the money in its sinking fund then they can refer to The Trusts Act 1973 in this respect’.

Adamson v Reid (1880) 6 VLR (E) 164, reaffirmed by the High Court of Australia in Byrnes v Kendle (2011) 243 CLR 253. Trustees are subject to the obligation to invest trust monies even where there is no direction in the trust instrument to this effect. However, refer to Castlebrook above: the ability for the body corporate to invest funds is discretionary according to statute, and investment is not mandatory.

Rainbow Village [2008] QBCCMCmr 313. The body corporate’s financial accounts must be in the name of the body corporate: it is not permissible for, say, the body corporate manager to have an account in their own name as trustee for the body corporate. Monies must be paid into an account in the sole name of the body corporate, and from there the funds may be invested.

Evolution Apartments [2012] QBCCMCmr 411, [54] and [55]. This concerned income tax and instalment taxes on sinking fund investments. ‘There is nothing to suggest these taxes are not recurrent expenditure.’ As such, those taxes on sinking fund investments were to be paid out of the administrative fund.

Spinnaker Blue [2018] QBCCMCmr 504. On budget requirements for sinking funds. See also [23] regarding the term ‘act reasonably’. The case of Greiner v ICAC (1992) 28 NSWLR 125 says ‘reasonableness’ is ‘the appropriate standard or quality of decision making that must be brought to bear when making an administrative decision. A statutory requirement to act reasonably or on reasonable grounds is satisfied if the decision meets an objective standard of reasonableness.’

See further on reasonableness Ainsworth v Albrecht [2016] HCA 40 and Body Corporate for Beaches Surfers Paradise v Backshall [2016] QCATA 177.

Russell Galer, ‘”Prudent Person Rule” Standard for the Investment of Pension Fund Assets’ (2002, OECD)

Prudent Person Rule Policy Framework March 2021 Version 13.0, Queensland Public Trustee

Maj Lolas, ‘The Prudent Person Rule – you really need to know it!’ (2000) 38 Journal of the Australian Plaintiff Lawyers Association 32.

[1] This is a requirement for all schemes, except a Specified Two-Lot Scheme. An example of the requirement is s 157 of the Accommodation Module. [2] Note: sinking fund is not a body corporate asset. Sinking fund is regulated by regulation modules under financial management, and is dealt with differently from body corporate assets. [3] BCCM Act s 94(2). [4] Accommodation Module s 157(8). [5] BCCM Act s 96(2)(b); Accommodation Module s 157(4). [6] Rainbow Village [2008] QBCCMCmr 313. [7] Harvard College v Amory, 23 Mass 446 (1830). [8] BCCM Act s 96. [9] BCCM Act s 44. [10] Acts Interpretation Act 1954 (Qld), sch 1 definition of ‘interest’. [11] See, eg, Poole v Pass (1839) 1 Beav 600; 48 ER 1074 and Re Brogden; Billing v Brogden (1888) 38 Ch D 546.


This article is intended as general information only and should not be relied upon as legal advice. For specific legal advice please contact us here.


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