This article is about the income from body corporate common property.
Table of Contents:
Question: If the body corporate uses sinking fund monies to purchase shares in a Pty Ltd company, who then are the shareholders in the case of a body corporate?
If the body corporate uses sinking fund monies to purchase shares in a Pty Ltd company, who then are the shareholders in the case of a body corporate?
If all owners are deemed to be shareholders in the company (and NOT just the committee), do all owners then have a vote in relation to company matters?
Answer: Despite being in plain black and white for 25 years, the biggest secret in the Body Corporate and Community Management Act 1997 is that Bodies Corporate can invest, in the same way that a trustee may invest.
Shh…. It’s a secret! Despite being in plain black and white for 25 years, the biggest secret in the Body Corporate and Community Management Act 1997 is that Bodies Corporate can invest, in the same way that a trustee may invest. There are limitations in the BCCM Act, including that the amounts invested are not immediately required and it’s the Body Corporate doing the investing.
So what can a ‘trustee’ invest in? Well, under the Trusts Act 1973, a trustee may, unless expressly forbidden by the instrument creating the trust (i.e. the BCCM Act is not an instrument but has its own limitations), invest funds in any form of investment. So, it’s possible for a Body Corporate to invest funds not immediately required by purchasing shares in a company.
Enterprising committees should however beware! The Pty means propriety – this means the shares cannot be readily traded and as such the shares may be an illiquid asset. The Ltd means limited – this means the shareholders liability (to the company) is limited to the (unpaid) value of the share.
This is where things start to get interesting – if a body corporate buys or is issued part paid shares that are liable to be forfeited if the ‘call’ for the balance is not met, is that company mortgaging a body corporate asset? What level of approval is required for that? What about a requirement in the shareholders agreement, for that Pty Ltd company, that shareholders must provide guarantees to help secure business loans for the company?
Because the body corporate is the shareholder, it is the body corporate who would be obliged to provide the guarantee? Fortuitously, because the body corporate is making the investment and holds the investment directly (it has trustee’s powers of investment, but does not hold investments as trustee), it is the lot owners or rarely the committee who will make investment decisions, according to the limitations in the BCCM Act. Investment decisions are spending decisions, but they are also decisions about acquisition and disposal of body corporate assets (being property which is not ‘real property’).
When investing as if it were a trustee, the body corporate’s powers are likewise limited by its obligations, including as to the proper assessment of potential investments. Which is of course, the reason that 99% or more of body corporate funds are held in boring old fixed terms deposits (aside from the preferential terms which the banks concerned offer the body corporate managers who bank with them). As for decisions made by shareholders in that Pty Ltd company, it would be the body corporate making them …. which of course sounds dangerously like the body corporate engaging in business decisions, in the management of a business for its own profit; i.e. carrying on a business contrary to s96(1) of the BCCM Act.
Michael Kleinschmidt
Bugden Allen Graham Lawyers
E: michael.kleinschmidt@bagl.com.au
P: 07 5406 1280
This post appears in Strata News #594
Have a question about income from body corporate common property or something to add to the article? Leave a comment below.
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.
Read next:
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- QLD: Is Your Body Corporate Overcharging?
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Thanks for the article Tammy.
One key thing for owners to be aware of is that they are still required to declare this sort of income even when they don’t physically take receipt of the funds. The ATO’s position is that the owners have still received a benefit in that scenario because if the body corporate / strata company / owners corporation did not retain the funds, the levies would, in theory at least, have been higher to compensate. It’s an often misunderstood point.
We wrote an article up on our business blog back in 2015 that summarised the key points of TR 2015/3 and if readers are interested in learning more about the matter, they can visit the below link:
https://www.ascendstrata.com.au/blog/ato-finalises-strata-tax-ruling