Things to think about when investing a strata company's surplus funds:



Is the Investment Actually Going to Result in a Profit?

We’re often asked if it’s worthwhile for a strata company to open a new term deposit. Whilst we aren’t able to answer this question directly (that would be giving financial advice), we are able to provide some guidance as to what the likely cashflow is to be.

Invariably, the question arises because the earning of investment income necessitates that a tax return be prepared… and therefore, the strata will likely be up for a fee to a tax agent.  If the strata company doesn’t earn more in interest than it costs to prepare a tax return, then they’re going to lose money overall.  Right?  Well, it’s not quite that simple as there are a couple of other factors to consider:


Factor 1: Carried Forward Losses 
Generally speaking, if a strata company makes a tax loss (ie: deductions exceed assessable income in a particular July to June financial year), this loss can be ‘carried forward’ and claimed as a deduction against taxable income in a future year*. The loss can be ‘carried forward’ indefinitely year after year but the catch is that a return needs to be prepared each year... otherwise the loss effectively disappears.

If future years are likely to see taxable profits arise, the losses of the current year can be claimed as tax deductions against those future taxable profits* and therefore, in terms of cashflow and tax, things may well even out over time (both in terms of expenses and tax), all else being equal. The likelihood of future profits will differ depending upon the plans of the individual strata company concerned and the prevailing interest rates available but, as a general rule, if the funds are to be invested for multiple years at a balance that will (either immediately or in time) consistently earn more interest than the cost of a tax return, then opening a term deposit will more than likely be cashflow positive overall for the strata company. 


Factor 2: The Strata Company May Need to do a Return Regardless  
Investment income is not the only catalyst for a strata company tax return being required. For example, fees received by the strata for the preparation of lot status certificates for potential buyers (think Section 110 of the WA Act) are also considered assessable for tax purposes. Therefore, if a strata company collects such a fee during a given financial year, then they are going to need to do a tax return anyway. This is the case even if the fee is then paid in full to the strata manager for preparing the document: it is the earning of income, not the making of profit, that necessitates a company tax return.

Where a strata company has to (or is likely to) have to prepare a tax return anyway, the investment of surplus funds in a term deposit may well not cause any additional tax return expense anyway… making the decision of whether to invest a much simpler one for the strata council. 

This however begs the question: How can you determine the likelihood of whether status certificate income is going to occur in any given year? Every building, every lot owner, every year is going to be different in terms of the likelihood of a single lot selling and the resultant requirement to prepare a status certificate. It’s a relevant but difficult question to quantify. As a very general rule though, publicly available data can be used to estimate for those that prefer things to be quantified:

Core Logic’s March 2022 report revealed that general turnover of dwellings in Australia over the preceding ten years was 6%. Assuming this is consistent between strata and non-strata, this would mean that there is roughly a 1 in 17 chance of any one lot being sold in any given year. Keep in mind though that it only takes one status certificate fee to trigger the need for a tax return. Whilst there is a probability based formula that can be applied, in short - the more lots on a strata plan, the higher the likelihood of a tax return being required. So, the bigger your strata plan, the less chance that a term deposit is going to be the cause of needing a tax return (all else being equal).



If a strata company’s proposed term deposit is likely to make more in interest than it costs to prepare a tax return then it is probably going to achieve positive cash flow as a result of investing the funds. 

If however the forecast interest is less than the cost to prepare a tax return then owners of smaller buildings in particular should consider how likely they are to make taxable profits on the investment into the future. Owners in larger buildings are often going to require an annual tax return anyway and therefore don’t need to be quite as concerned about earning enough interest on the funds to cover the cost of tax return preparation fees.


For more information, please contact the Ascend office via your strata manager.


*There is even scope to use the loss of the current year to generate a refund of tax paid in a prior year in some circumstances.  Click Here.


The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above.  Please contact our office for more information.

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