Sterling Income Trust and its controlled entities ARSN

Transcription

1 This is Annexure A of 42 pages referred to in Form 388 Copy of financial statements and reports for Scheme Name: Sterling Income Trust and its controlled entities Director ARSN: Theta Asset Management Limited ABN: ASFL: Date 1 February 2019 Sterling Income Trust and its controlled entities ARSN Consolidated Financial Report For the year ended

2 Sterling Income Trust and its controlled entities For the year ended Contents Page Directors Report 1 Auditor s Independence Declaration 11 Consolidated Statement of Profit or Loss and Other Comprehensive Income 12 Consolidated Statement of Financial Position 13 Consolidated Statement of Changes in Equity 14 Consolidated Statement of Cash Flows 15 Notes to the Consolidated Financial Statements 16 Directors Declaration 39 Independent Auditor s Report 40

3 For the year ended Directors Report The Directors of Theta Asset Management Ltd ("the Responsible Entity ), the Responsible Entity of the Sterling Income Trust ("the Trust ), present their report together with the consolidated financial statements of Sterling Income Trust, and its controlled entities Income Trust (formerly RMA Holding Trust), Growth Trust, Property Development Trust, Management Company Share Trust and First Mortgage Trust (collectively "the Group"), for the year ended and the auditor s report thereon. The Responsible Entity The Responsible Entity of the Trust is Theta Asset Management Ltd, which has been the Responsible Entity since 19 June The principal place of business of the Responsible Entity is Suite 501, Level 5, 210 Clarence Street, Sydney NSW The principal place of business of the Group is Suite 501, Level 5, 210 Clarence Street, Sydney NSW The Directors of Responsible Entity during the financial year ended and up to the date of this report are: Name and appointment Experience, qualifications and special responsibilities ROBERT MARIE Executive Mr Marie has over 29 years experience in financial services having spent six years at Macquarie Bank as a state manager for Western Australia and South Australia. He was also the product manager for Macquarie s successful Cash Management Trust in addition to a range of equity based funds. Mr Marie was General Manager Marketing of the Bridges Group with responsibility for the inhouse platform which had 1.5 billion under administration. Since moving to Western Australia, Mr Marie was Responsible Manager and Director of Wealth Management and Insurance at BankWest. Following the takeover of BankWest by HBOS, Mr Marie established Valuestream which is a specialist Responsible Entity service provider which includes Theta. MICHAEL FENECH NonExecutive Mr Fenech has spent over 32 years in banking and finance, 17 of those in financial markets in senior roles with Macquarie Bank, National Australia Bank, CUSCAL and HSBC. Following 9 years at CUSCAL, Mr Fenech was appointed the Chief Operating Officer at HSBC Australia, responsible for the bank s operations in Australia and New Zealand. In this role he successfully restructured the business focusing on compliance, risk and cost management. Since 2007, Mr Fenech has been on a number of Boards as well as running a consultancy business for financial services organisations focusing on Credit Unions, Fund Managers and Financial Planners. NORMAN GIBSON NonExecutive Mr Gibson has been admitted as a solicitor of the Supreme Court of New South Wales and of the High Court of Australia for more than 30 years. Mr Gibson has been accredited by the Law Society of New South Wales as a specialist in Business Law for more than 25 years and is the senior partner in Gibsons Lawyers which is based in Sydney. Mr Gibson was a Director of two American companies operating in Australia one of which for more than 18 years and the other for more than 10 years. Mr Gibson was also the honorary trade representative in Australia for the State of Minnesota, USA, for more than 10 years. Principal Activities The Trust is a registered managed investment scheme domiciled in Australia. The principal activity of the Trust is to provide investors options to invest in property related financial assets, such as mortgage backed securities, income rights for rental management agreements or exposure to the group which manages the Trust. The Trust offers four investment units, namely Income Units, Growth Units, Development Units and Management Company Units. Income Units Income Units invest in the Income Trust which purchases rights to receive income over Rental Management Agreements, and holds security over the purchased Rental Management Income Rights. Growth Units Growth Units invest in the Growth Trust, which provides residential Rental Management Growth Rights the first right to income generated from the sale of rental management agreements. The Growth Trust was established in January Page 1

4 For the year ended Directors Report (Continued) Principal Activities (Continued) Development Units Development Units invest in the Property Development Trust, which provides secured first or subordinate ranking mortgage loans secured over residential property to a maximum loan to cost ratio of 100%. Management Company Units Management Company Units invest in the Management Company Share Trust, which purchases shares in Sterling First (Aust) Ltd, the parent entity of the Management Company. Group review On 1 October 2017, Sterling First (Aust) Ltd, the issuer of the A Class Preference Shares whereby Management Company Share Trust had investments totalling to 510,750, converted all the A Class Preference Shares to Nonredeemable Preferences Shares on a one for one basis. On 23 March 2018, Income Holdings Pty Limited, the Trustee of Income Trust signed a new Finance Agreement with Macquarie Bank Limited for the following purposes: Repay the existing Macquarie Bank facility (with expiration on 17 December 2019); and Increase in the facility limit to assist with rent roll acquisitions. The new Finance Agreement has a facility limit of 4,550,000, bears commercial interest rate per annum and with a term of three years from initial drawdown date. On 19 June 2018, this facility limit was increased to 5,050,000, with term of three years from 21 June On 23 March 2018, the existing Macquarie Bank facility with the carrying balance of 3,279,967 was fully settled. On 27 March 2018, Sterling First (Aust) Ltd, the issuer of the Nonredeemable Preference Shares whereby Management Company Share Trust had investments totalling to 1,064,327, converted all the Nonredeemable Preferences Shares to Ordinary Shares on a one for one basis. The conversion was approved through the Extraordinary General Meeting of Preference Shareholders on the same date. During the year ended, a total of 5,655,558 rental management agreement rights were acquired by the Income Trust. The acquisitions were partly funded by new applications, the new Finance Agreement and internal funds of Income Trust. Losses on Rental Management Agreement rights also occurred with a total of 1,289,372. Income Trust received rebates from these losses totalling to 1,054,360. The rebates are calculated based on a formula as disclosed in the PDS. During the year ended, a total of 3,688,015 organic growth rights were acquired by the Growth Trust. The acquisitions were funded by new applications. On 1 May 2018, the Responsible Entity closed the Trust to new applications for Income and Growth units and withdrew the PDS issued on 27 October It is also noted that on 29 August 2017, the Responsible Entity closed the Trust to new applications for its Development and Management Company Units. Decision not to reissue the PDS and windup the Trust in an orderly fashion In early August 2018, the Responsible Entity in conjunction with the Investment Manager, Sterling Corporate Services Pty Ltd considered the future of the Trust having regard to the four classes of units as described above. After this review, the Responsible Entity determined it was not in a position to reissue the PDS and accept any further applications. In addition, the Responsible Entity was unable to form a view as to the valuation of each of the unit classes due to the unavailability of the underlying asset valuations. The Investment Manager has confirmed to the Responsible Entity that the Trust is below the size that is required for it to be economical to operate. That is the management fees, based on the funds currently invested, do not exceed the operating cost of the Trust. To date, the Investment Manager has been absorbing some of these costs and has indicated that it will no longer continue to absorb these operating costs in the future or provide any other form of ongoing support to the Trust. In the view of the Responsible Entity, it is not economical or in the best interest of the existing unitholders to carry all the operating costs of the Trust based on its current size. The Responsible Entity explored operating one or more of the unit classes separately but determined that the remaining unit classes would not be large enough to operate cost effectively for the remaining unitholders. For these reasons, the Responsible Entity and Investment Manager believed it would be in the best interest of all unitholder to commence the orderly windup process of the Trust. The Responsible Entity has sought legal advice regarding this decision and confirmed that it is not in the best interest of the unitholders as a whole to continue the operation of the Trust. As a result, the Responsible Entity notified the Australian Securities and Investments Commission and all unitholders that the Trust shall be woundup in accordance with clause 17.1 of the Trust Constitution, with effect from 13 August The Responsible Entity, with the assistance of the Investment Manager, will operate all the unit classes in accordance with the investment mandate and manage an orderly disposal of all the assets for the benefit of unitholders in accordance with the Trust Constitution. Page 2

5 For the year ended Directors Report (Continued) Updates on the unit classes Income Units The Income Unit Class continues to operate as usual with distributions continuing as normal. The last distribution paid was cents per unit (annualised at 7.49 cents per unit) paid on 21 December 2018 for a record date of 30 November The Responsible Entity and the Investment Manager are assessing the different options available to realise the underlying assets to ensure that the consideration to be received is reasonable and in the interests of the unitholders of the Income Units. These include the following: sale of the Income Trust, the subtrust of the Group which holds all of the assets and liabilities relating to the Income Units, with net proceeds distributed to unitholders; sale of the Income Rights held in the Income Trust, repayment of the Macquarie Bank facility and any other liabilities, and collection of any other amounts due to the Income Trust, with the net proceeds distributed to unitholders; or sale of the property management agreements relating to the Income Rights held in the Income Trust and passing the sales proceeds to the Income Trust pursuant to the Income Rights agreement. The proceeds would be applied to repaying the Macquarie Bank facility and any other liabilities. The Trust would then collect any other amounts due to the Income Trust with net proceeds distributed to unitholders. The Investment Manager is in discussions with a potential investor which is considering either option 1 or 2 above. Any decisions to be made in accepting an offer will be based on the best outcome for unitholders of the Income Units. It is anticipated that this process will be concluded in the first half of Growth Units The Growth Unit Class continues to operate as usual with distributions continuing as normal. The last distribution paid was cents per unit (annualised at cents per unit) paid on 18 December 2018 for a record date of 30 November The Responsible Entity and the Investment Manager are in discussions with an external party that showed interest that would potentially make an offer to the unitholders of the Growth Units. Should an offer to acquire all the Growth Units were to proceed, it is anticipated to take place in the first half of Development Units The unitholders of the Development Unit Class were advised on 27 September 2018 that no further distributions were expected to be paid. This was due to the inability of the borrower to meet the repayment of the interest on the underlying loans. The last distribution was for June 2018 and was paid in July On 24th August 2018, a notice of default was served to the borrower and was required to remedy the default within three months or provide the trustee of Property Development Trust (subtrust) with an alternative proposal to remedy the default. The borrower is working with the Trustee of the subtrust, Responsible Entity of the Trust and the Investment Manager to formulate a strategy that will result in the realisation of underlying assets at a consideration that is reasonable and in the interests of the unitholders of the development units. The Responsible Entity is considering following three options: Forced sale of the underlying properties the fastest method of realisation, but likely to result on lower realisation for unit holders; Orderly sale of the underlying properties a slower method of sale, but likely to result in a higher realisation for unitholders; or Hold strategy resulting in unitholders of the development units receiving a direct fractional ownership in the underlying properties likely to result in the greatest realisation for unitholders, but on an extended timescale. In assessing the alternative, the Responsible Entity will be taking into consideration the likely timeframe for realisation of the assets and the possible time value of the funds. The Responsible Entity is likely to call a meeting with the unitholders early in 2019 when full details are available to consider which option to pursue. Management Company Units The unitholders of the Management Company Unit Class received distribution in specie of the underlying shares in Sterling First (Aust) Limited ("SFAL"). Each unitholder of Management Company Units received four SFAL shares for each unit held. The transaction was completed on 30 November Review of Operations Results The Group made a loss from operations before distributions of 43,309 (2017: 2,549,651 income), and has declared distributions for the financial year ended of 3,274,413 (2017: 2,531,729). The distributions comprised of an income and tax deferred return of 10.87% (2017: 10.38%). The loss was attributed to the impairment of the loans receivable amounting to 3,297,673. The impairment was recognised after an assessment was made on the recoverability of the loans whereby the fair value of the properties secured were below the carrying values of the loans receivable. Page 3

6 For the year ended Directors Report (Continued) Review of Operations (Continued) Profit and loss for the year ended Management Develop First Income Growth ment Company Mortgage Blended Units Units Units Units Units 1 Units 2 Total Revenue Rental Management Agreements (RMA) fee income 3,371,020 3,371,020 Organic growth rights income 484, ,429 Rebates from loss of RMA income rights 1,054,360 1,054,360 Interest and dividend income 116,062 1,687,476 14,242 1,817,780 Income subsidy 378,130 1,886 (3,254) 376,762 Sundry income 3,494 7,503 10,997 Total income 4,923, ,315 1,684,222 21,745 7,115,348 Expenses RMA fee expense Other trust expenses Fair value adjustment to RMA rights Impairment of loans receivable Interest expenses Total expenses 1,764, ,990 1,289, ,370 3,587,124 82,190 82, ,627 3,297,673 3,454,300 34,400 34, ,764, ,510 1,289,372 3,297, ,370 7,158,317 Profit/(loss) 1,335, ,125 (1,770,078) (12,655) (303) (42,969) Other comprehensive income Net profit/(loss) 1,335, ,125 (1,770,078) (12,655) (303) (42,969) Parent entity unallocated net (loss) Group net (loss) (340) (43,309) The difference in total revenue and expenses for the year ended of 1,714 and 2,054 represents the parent entity results that were not allocated to the subsidiaries. The distribution income of 3,274,413 and other trust expenses of 596,564 were excluded in the calculation. Profit and loss for the year ended Management Develop First Income Growth ment Company Mortgage Blended Units Units Units Units Units 1 Units 2 Total Revenue Rental Management Agreements (RMA) fee 2,910,548 1,855 2,912,403 Organic growth rights income 9,247 9,247 Rebates from loss of RMA income rights 981, ,445 Interest and dividend income 115,833 1,290,198 29,985 21,451 1,975 1,459,442 Income subsidy 463,521 35, ,382 5, ,796 Total income 4,471,347 44,421 1,493,580 35,704 21,451 3,830 6,070,333 Expenses RMA fee expense Other trust expenses 1,580, ,095 10, ,056 20,070 3,382 2,124 1,580, ,449 Fair value adjustment to RMA rights 1,231,595 1,231,595 Impairment of loans receivable Interest expenses 201, ,217 Total expenses 3,323,328 10, ,056 20,070 3,382 2,124 3,520,682 Profit/(loss) 1,148,019 33,699 1,332,524 15,634 18,069 1,706 2,549,651 Other comprehensive income Net profit/(loss) 1,148,019 33,699 1,332,524 15,634 18,069 1,706 2,549,651 Parent entity net profit Group net (loss) 2,549,651 1 All the units in the First Mortgage Units were redeemed in November All the units in the Blended Units were redeemed in August Page 4

7 For the year ended Directors Report (Continued) Distributions Distributions paid or payable in respect of the financial year were: 2018 Distributions Paid: July ,879 August ,126 September ,542 October ,126 November ,341 December ,530 January ,736 February ,611 March 2018 April 2018 May , , ,559 1,229,930 15,688 18,871 18,262 18,871 32,054 36,341 36,906 38,062 48,360 45,695 50, , , , , , , , , , , , ,978 1,406,054 Management Company Units 6,750 6,750 First Mortgage Trust Units 1 Develop Income Units Growth Units ment Units Blended Units 2 Total 256, , , , , , , , , , ,386 3,002,693 Distributions Payable: June ,011 1,335,941 44, , ,541 1,527,595 6, ,720 3,274,413 Cents per unit Distributions Paid: July 2017 August 2017 September 2017 October 2017 November 2017 December 2017 January 2018 February 2018 March 2018 April 2018 May Distributions Payable: June Annualised Distribution return % 8.84 % % % 0.27 % % The above figures are on an annualised basis, as if investors had been investors throughout the year. Starting from 1 March 2018, distributions were based on net profit and paid monthly (2017: calculated as a static return per annum and paid monthly). 1 All the units in the First Mortgage Units were redeemed in November All the units in the Blended Units were redeemed in August 2016 Page 5

8 For the year ended Directors Report (Continued) Distributions (Continued) Distributions paid or payable in respect of the prior financial year were: Income Units 2017 Distributions Paid: July ,671 August ,068 September ,066 October ,094 November ,460 December ,699 Janauary ,481 February ,259 March ,809 April ,222 May ,696 1,035,525 Distributions Payable: June ,609 1,141,134 Growth Units 4,472 7,122 10,431 22,025 11,674 33,699 Develop ment Units 87,750 92,967 98, , , , , , , , ,091 1,200, ,072 1,325,539 Management Company Units 981 3,008 6,234 10,223 5,411 15,634 First Mortgage Units 1 2,911 3,174 3,071 3,174 1,685 14,015 14,015 Blended Units 2 1,708 1,708 1,708 Totals 180, , , , , , , , , , ,218 2,283, ,766 2,531,729 Cents per unit Distributions Paid: July 2016 August 2016 September 2016 October 2016 November 2016 December 2016 January 2017 February 2017 March 2017 April 2017 May Distributions Payable: June Annualised Distribution return % 9.25 % % % 0.01 % 7.90 % 9.29 The above figures are on an annualised basis, as if investors had been investors throughout the year. 1 All the units in the First Mortgage Units were redeemed in November All the units in the Blended Units were redeemed in August 2016 Net Assets as at 12,408,300 4,989,200 4,355,582 1,644,983 1 as at 10,447,230 1,279,333 7,636,458 1,614,389 1,253 The difference in net assets as at of 19,640 (: 19,029) represents the net assets of the parent entity excluding its investments in the subsidiaries. Page 6

9 For the year ended Directors Report (Continued) Interests of the Responsible Entity The following fees were paid to the Responsible Entity and its associates out of the Group's assets during the financial year: Consolidated Responsible Entity fees paid directly by the Group Parent Responsible Entity fees paid directly by the Group 82,364 82, , ,364 Except as disclosed in this report or in the notes to the consolidated financial statements, since the date of commencement, no Director of the Responsible Entity has received or become entitled to receive any benefit because of a contract made by the Responsible Entity or a related entity with a Director, or with a firm of which a Director is a member, or with an entity in which a Director of the Responsible Entity has a substantial interest. Significant Changes in the State of Affairs of the Group Issue of New PDS and withdrawal of PDS On 29 August 2017, the Responsible Entity closed the Trust to new applications for its Development and Management Company Units and withdrew the PDS issued on 20 May On 27 October 2017, the Trust issued a new PDS for the Income and Growth Units. The new PDS contained updated fees and costs to comply with the new RG97 PDS standards, update the content and in some cases make the wording more clear and concise. The only substantive change was in the Unit Valuation methodology. On 1 May 2018, the Responsible Entity closed the Trust to new applications for Income and Growth units and withdrew the PDS issued on 27 October There were no other significant changes in the state of affairs of the Group that occurred during the financial year under audit other than noted elsewhere in the Directors Report. Valuation of Units Property management income rights (RMAs) are classified as financial instruments under Australian Accounting Standards and are accounted for as per Note 2(e). A difference currently exists between the valuation of these financial instruments and the PDS issued. A comparison is provided below showing the net book asset value to the net current value per unit as at (refer to Reconciliation Section of this report for the reconciliation to the financial statements): Cash, receivables and other assets Receivable parent entity Property management income rights Carrying Value PDS Valuation Adjustment 2 Other financial assets Total assets Net assets 13,408,497 Equity 13,408,497 Number of units Net asset value per unit Income Units Growth Units Develop ment Units 1,513, ,917 55, ,446 15,583,226 1,000,197 16,583,423 1,199,123 19,516,948 16,088, ,967,338 5,157,255 Trade and other payables Payable parent entity Borrowings 1,646,742 4,461,709 (23) 168,078 66, ,713 Total liabilities 6,108, , ,679 4,989,200 4,989,200 4,989, ,661,951 4,717,261 4,355,582 4,355,582 7,651, Management Company Units 22,914 1,667,103 1,690, ,334 45,034 1,644,983 1,644,983 2,521, First Mortgage Units 1 Totals 1 1,782, , ,583,226 1,000,197 16,583,423 12,495,515 31,081,482 1,714, ,125 4,461,709 6,683,219 24,398,263 24,398,263 31,251, All the units in the First Mortgage Units were redeemed in November On 27 October 2017, a new PDS was issued for the Income Units and Growth Units. As part of the PDS issue process, aspects of the asset valuation and unit pricing methodology were revised to reflect valuation changes of the underlying investments as certain data used to determine the values previously were no longer published. Page 7

10 For the year ended Directors Report (Continued) Valuation of Units (Continued) A comparison is provided below showing the net book asset value to the net current value per unit as at (refer to Reconciliation Section of this report for the reconciliation to the financial statements): Trade and other payables Payable parent entity Borrowings Reconciliation to the Financial Statements Income Growth Develop ment Management Company First Mortgage Units Units Units Units Units 1 Totals Cash, receivables and other assets Receivable parent entity Property management income rights 1,265,208 93,677 8,295 90,190 97,995 4,739 1,466,427 93,677 Carrying Value 10,230,326 10,230,326 PDS Valuation Adjustment 2 3,749,986 3,749,986 13,980,312 13,980,312 Other financial assets 1,199,123 1,279,323 7,738,388 1,540,103 11,756,937 Total assets 16,538,320 1,287,618 7,828,578 1,638,098 4,739 27,297, ,638 8,285 86,746 2, , ,374 21,709 3, ,569 1,925,466 1,925,466 Total liabilities 2,341,104 8, ,120 23,709 3,486 2,568,704 Net assets 14,197,216 1,279,333 7,636,458 1,614,389 1,253 24,728,649 Equity 14,197,216 1,279,333 7,636,458 1,614,389 1,253 24,728,649 Number of units 13,858,510 1,279,332 7,635,160 2,459, ,232,226 Net asset value per unit , Cash, receivables and other assets Receivable parent entity Property management income rights Carrying Value PDS Valuation Adjustment 2 Other financial assets Total assets Total Amount in the Valuation of Units Parent Entity Balances 1 Amount in the Financial Statements Total Amount in the Valuation of Units Parent Entity Balances 1 Amount in the Financial Statements 1,782, ,397 2,036,495 1,466, ,037 2,273, ,446 (220,446) 93,677 (93,677) 15,583,226 1,000,197 16,583,423 12,495,515 31,081,482 33,951 15,583,226 15,583,226 12,495,515 30,115,236 10,230,326 3,749,986 13,980,312 11,756,937 27,297, ,360 10,230,326 10,230,326 11,756,937 24,260,727 Trade and other payables Payable parent entity Borrowings Total liabilities 1,714, ,125 4,461,709 6,683, ,379 (539,068) 14,311 2,267,764 (31,943) 4,461,709 6,697, , ,569 1,925,466 2,568, ,900 (130,569) 694,331 1,337,569 1,925,466 3,263,035 Net assets 24,398,263 19,640 23,417,706 24,728,649 19,029 20,997,692 Equity 24,398,263 19,640 23,417,706 24,728,649 19,029 20,997,692 1 The parent entity balance excludes its investments in subsidiaries since these are eliminated at consolidation. 2 The amount is the difference in the carrying value of the rental management agreement rights and the valuation methodology in accordance with the PDS. Page 8

11 For the year ended Directors Report (Continued) Going Concern On 27 August 2018 following the review and assessment made by the Responsible Entity in conjunction with Sterling Corporate Services Pty Ltd ("the Investment Manager"), the Responsible Entity notified the Australian Securities and Investments Commission ("ASIC") and all unitholders that the Trust shall be woundup in accordance with clause 17.1 of the Trust Constitution, with effect from 13 August The Responsible Entity, with the assistance of the Investment Manager, will operate all the unit classes in accordance with the investment mandate and manage an orderly disposal of all the assets for the benefit of unitholders in accordance with the Trust Constitution. As such, the Responsible Entity has concluded that the going concern assumption is no longer appropriate. Accordingly, the consolidated financial report of the Group has not been prepared on a going concern basis. Under this basis, the recognition and measurement requirements specified by Australian Accounting Standards and Interpretations have been applied in the context of the Group ceasing to be on a going concern basis. As a consequence, the application of these requirements may result in the writedown of assets to their recoverable amounts, and the recognition and/or remeasurement of liabilities for obligations that exist at the reporting date. All assets and liabilities in the financial statements of the Group have been classified as current as a result of the windup of the Group. No additional provisions or liabilities have been recognised as the Responsible Entity has not incurred any additional legal or contractual obligations as at. Likely Developments The Group will continue their current activities in accordance with the Responsible Entity s guidelines and the objectives of the Trust until the windup process is finalised. At the time of preparing this report apart from the notes under Going Concern and Events Subsequent to Reporting Date, the Responsible Entity is not aware of any other likely developments. Events Subsequent to Reporting Date On 2 July 2018, Rental Management Australia Developments Pty Ltd, the issuer of the Unsecured Convertible Preference Shares whereby Income Trust had investments totalling to 1,199,123, redeemed 483,000 preference shares at 1 per share. On 27 August 2018, the Responsible Entity notified ASIC that the Trust shall be woundup in accordance with clause 17.1 of the Trust Constitution, with effect from 13 August Refer to Principal Activities Section and Going Concern Section of this report for further details. On 28 August 2018, the Responsible Entity notified the unitholders of its intention to windup the Trust. Refer to Principal Activities Section and Going Concern Section of this report for further details. On 30 August 2018, the Responsible Entity notified no future Development Unit distributions are expected to be paid after. Refer to Principal Activities Section and Going Concern Section of this report for further details. On 30 November 2018, the Management Company Units received an in specie distribution of SFAL shares and units were cancelled accordingly. This distribution commenced the wind up of the MCU class. On 24 January 2019, Income Trust paid a portion of the Macquarie Bank loan amounting to 200,000. Apart from the above, no matters or circumstances have arisen since the end of the year which significantly affected or may significantly affect the operations of the Group, the result of those operations in subsequent financial periods. Indemnifications and Insurance of Officers Indemnification Under the Trust Constitution the Responsible Entity, including its officers and employees, is indemnified out of the Trust s assets for any loss, damage, expense or other liability incurred by it in properly performing or exercising any of its powers, duties or rights in relation to the Trust. The Trust has not indemnified any auditor of the Group. Insurance Premiums No insurance premiums are paid out of the assets of the Trust in regards to insurance cover provided to the Responsible Entity or the auditors of the Group. Additional Information Investment Policy of the Group The primary objective of the Group is to provide investors with a regular, reliable income stream. The Group also aims to provide investors with a long term investment that seeks to provide an ongoing income stream with a share of investment profits. Borrowing Policy of the Group The Trust s Constitution provides that the Trust may borrow. The Trust has obtained bank funding to assist with the acquisition of Rent Rolls and Rental Management Agreements. Page 9

12 For the year ended Directors Report (Continued) Proceeding on Behalf of the Trust No person has applied for leave of Court to bring proceedings on behalf of the Group or intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the Group for all or any part of those proceedings. The Group was not a party to any such proceedings during the year. Rounding of Amount to Nearest Dollar In accordance with ASIC Corporations (Rounding of financial/directors' Reports) Instrument 2016/191, the amount in the Directors' Report and in the financial report have been rounded to the nearest dollar. Lead Auditor s Independence Declaration The lead auditor s independence declaration is set out on page 11 and forms part of the Directors Report for the year ended. Signed in accordance with a resolution of the Directors of the Responsible Entity: Robert Marie Director of Theta Asset Management Limited Dated at Perth this 1st day of February 2019 Page 10

13 Auditor s Independence Declaration To the Directors of Theta Asset Management Ltd As Responsible Entity of ARSN As lead auditor for the audit of Sterling Income Trust and its controlled entities for the year ended 30 June 2018, I declare that to the best of my knowledge and belief, there have been: a. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Sterling Income Trust and its controlled entities during the year ended. C I Chandran Partner Pitcher Partners Sydney 1 February An independent New South Wales Partnership. ABN Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne Sydney Perth Adelaide Brisbane Newcastle An independent member of Baker Tilly International

14 For the year ended Consolidated Statement of Profit or Loss and other Comprehensive Income Notes Revenue: Rental Management Agreements fee income 3,371,020 Organic growth rights income 484,429 Rebates from loss of Rental Management Agreement rights 1,054,360 Interest and dividend income 1,818,659 Income subsidy 376,762 Sundry income 7,117,062 2,912,403 9, ,445 1,459, ,796 11,832 6,070,333 Expenses: Management fees expense Rental Management Agreement fees expense Other trust expenses Loss on Rental Management Agreement rights Interest expense Impairment expense 7(a) 6(a) 285, ,797 1,764,392 1,580, , ,652 1,289,372 1,231, , ,217 3,297,673 7,160,371 3,520,682 (Loss)/profit for the year attributable to unitholders of the parent (43,309) Other comprehensive income 2,549,651 Total comprehensive (loss)/income for the year attributable to unitholders of the parent (43,309) 2,549,651 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. Page 12

15 As at Consolidated Statement of Financial Position Current assets Cash and cash equivalents 4 Trade and other receivables 5 Financial assets: Loans receivable 6 Rental Management Agreement rights 7 Organic growth rights 8 Investment in preference shares 9 Investment in ordinary shares 10 Other assets 11 Total current assets Noncurrent assets Financial assets: Rental Management Agreement rights 7 Organic growth rights 8 Investment in preference shares 9 Investment in ordinary shares 10 Total noncurrent assets Total assets Notes 636,087 1,390,185 4,661,951 15,583,226 4,967,338 1,199,123 1,667,103 10,222 30,115,235 30,115, ,775 1,474,826 7,738,388 20,863 10,011,852 10,230,326 1,279,323 2,263, ,776 14,248,875 24,260,727 Current liabilities Trade and other payables 12 1,964,100 1,089,803 Distributions payable , ,766 Financial liabilities 14 4,461,709 Total current liabilities 6,697,529 1,337,569 Noncurrent liabilities Financial liabilities 14 Total noncurrent liabilities Total liabilities Net assets Equity Units issued 15 Accumulated losses Total equity 6,697,529 23,417,706 30,127,841 (6,710,135) 23,417,706 1,925,466 1,925,466 3,263,035 20,997,692 24,390,105 (3,392,413) 20,997,692 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. Page 13

16 For the year ended Consolidated Statement of Changes in Equity Units issued Balance at 1 July ,286,195 Comprehensive income: Profit for the year Other comprehensive income Total comprehensive profit for the year attributable to unitholders of the parent Transactions with unitholders of the parent in their capacity as owners: Distribution to unitholders of the parent Issue of new units 9,219,924 Redemption of units (1,116,014) Total transactions with unitholders of the parent 8,103,910 Balance at 24,390,105 Accumulated Losses (3,410,335) 2,549,651 2,549,651 (2,531,729) (2,531,729) (3,392,413) Total Equity 12,875,860 2,549,651 2,549,651 (2,531,729) 9,219,924 (1,116,014) 5,572,181 20,997,692 Balance at 1 July ,390,105 Comprehensive income: Loss for the year Other comprehensive income Total comprehensive profit for the year attributable to unitholders of the parent Transactions with unitholders of the parent in their capacity as owners Distribution to unitholders of the parent Issue of new units 6,097,694 Redemption of units (359,958) Total transactions with unitholders of the parent 5,737,736 Balance at 30,127,841 (3,392,413) (43,309) (43,309) (3,274,413) (3,274,413) (6,710,135) 20,997,692 (43,309) (43,309) (3,274,413) 6,097,694 (359,958) 2,463,323 23,417,706 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Page 14

17 For the year ended Consolidated Statement of Cash Flows Cash flows from operating activities Cash receipts in the course of operations Cash payments in the course of operations Interest received Bank interest paid Net cash flows from operating activities Notes 4(a) 5,271,605 (1,364,433) 131,309 (212,370) 3,826,111 4,508,716 (3,411,638) 138,761 (201,217) 1,034,622 Cash flows from investing activities Loans provided to related parties Collection of loans receivable Payments for the acquisition of Rental Management Agreement rights Payments for the acquisition of organic growth rights Payments for the acquisitions of preference shares Payments for the acquisitions of ordinary shares Net cash flows used in investing activities 1,465,969 (6,642,272) (3,688,015) (127,000) (8,991,318) (4,245,353) 2,070,900 (1,740,048) (1,279,323) (1,026,827) (463,276) (6,683,927) Cash flows from financing activities Proceeds from bank loan Repayments of bank loan Proceeds from issuance of units Payments for the redemptions of units Distributions paid Net cash flows from financing activities 5,816,210 (3,279,967) 6,097,693 (359,958) (3,250,459) 5,023,519 59,010 (1,000,000) 9,257,321 (1,116,014) (2,710,338) 4,489,979 Net decrease in cash held (141,688) (1,159,326) Cash and cash equivalents at beginning of year 777,775 1,937,101 Cash and cash equivalents at end of year 4 636, ,775 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. Page 15

18 For the year ended NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION These consolidated financial statements and notes represent those of the Sterling Income Trust (the Trust ) and its controlled entities (collectively the Group ). Sterling Income Trust is a unit trust, incorporated and domiciled in Australia. The Trust is a registered Managed Investment Scheme under the Corporations Act The Trust was established on 19 June 2012 and commenced operations on 2 May 2013 when the first units in the Trust were issued. The consolidated financial statements were authorised for issue by the Board of Directors of the Responsible Entity on 1 February SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act The Group is a forprofit entity for financial reporting purposes under Australian Accounting Standards. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in financial statements containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards as issued by the IASB. Going Concern On 27 August 2018 following the review and assessment made by the Responsible Entity in conjunction with Sterling Corporate Services Pty Ltd ("the Investment Manager"), the Responsible Entity notified the Australian Securities and Investments Commission ("ASIC") and all unitholders that the Trust shall be woundup in accordance with clause 17.1 of the Trust Constitution, with effect from 13 August The Responsible Entity, with the assistance of the Investment Manager, will operate all the unit classes in accordance with the investment mandate and manage an orderly disposal of all the assets for the benefit of unitholders in accordance with the Trust Constitution. As such, the Responsible Entity has concluded that the going concern assumption is no longer appropriate. Accordingly, the consolidated financial report of the Group has not been prepared on a going concern basis. Under this basis, the recognition and measurement requirements specified by Australian Accounting Standards and Interpretations have been applied in the context of the Group ceasing to be on a going concern basis. As a consequence, the application of these requirements may result in the writedown of assets to their recoverable amounts, and the recognition and/or remeasurement of liabilities for obligations that exist at the reporting date. All assets and liabilities in the financial statements of the Group have been classified as current as a result of the windup of the Group. No additional provisions or liabilities have been recognised as the Responsible Entity has not incurred any additional legal or contractual obligations as at. The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. (a) Principles of consolidation The financial report relates to Sterling Income Trust and its controlled entities as a consolidated entity. The financial report has been prepared on an accruals basis and is based in the context of the Group ceasing to be on a going concern basis as disclosed in the Going Concern section above. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control ceases. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intragroup transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. (b) Functional currency These financial statements are presented in Australian dollars, which is the Group s functional and presentation currency. Page 16

19 For the year ended NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Rental Management Agreement fees income Revenue from Rental Management Agreement fees are recognised upon the percentage of completion and delivery of services to customers. Organic growth rights income Revenue from organic growth rights are recognised based on the share of the income earned by Rental Management Australia Developments Pty Ltd from arranging property management agreements for Rental Management Australia Pty Ltd. Rebates from loss of Rental Management Agreement rights Rebates from loss of Rental Management Agreement rights are recognised when the right to receive the rebates occur. Interest income Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Dividend income Dividend income is recognised when the right to receive the dividends has been established. Income subsidy Income subsidy is recognised upon the Investment Manager's declaration that a subsidy is to be provided to the Group. All revenue is stated net of the amount of goods and services tax (GST). (d) Significant accounting judgements, estimates and assumptions The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements and estimates on historical experience and on other factors considered reasonable under the circumstances. Management has identified critical accounting policies for which significant judgements, estimates and assumptions are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Further details of the nature of these assumptions and conditions may be found in the relevant notes to the consolidated financial statements. (e) (i) (ii) Financial instruments Classification Financial instruments comprise: (a) Financial assets at fair value through profit or loss; (b) Financial assets that are subsequently measured at amortised cost; (c) Financial assets at fair value through other comprehensive income; and (d) Financial liabilities that are subsequently measured at amortised cost. Recognition The Group recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. Financial instruments are recognised using trade date accounting. From this date any gains and losses arising from changes in fair value of the financial assets or financial liabilities are recorded. Financial liabilities are not recognised unless one of the parties has performed or the contract is a derivative contract not exempted from the scope of the accounting standards. Page 17

20 For the year ended NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) (iii) Financial instruments (continued) Measurement Financial instruments are measured initially at fair value (transaction price) plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately, while on other financial instruments they are amortised. Financial assets are classified at fair value through profit or loss when they are designated as such to avoid an accounting mismatch or to enable fair value performance evaluation by key management personnel. They are measured at their fair value at each reporting date and any increment or decrement in fair value from the prior period is recognised in profit or loss of the current period. Financial assets subsequently measured at amortised cost is determined using the effective interest rate method, less impairment losses, if any. Financial assets at fair value through other comprehensive income are subsequently measured at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity. Financial liabilities, other than those at fair value through profit or loss, are measured at amortised cost using the effective interest rate. Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or it transfers the financial asset to another party whereby the Group no longer has any significant continuing involvement in the risks and benefits associated with the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. (iv) Impairment Certain financial assets are tested for impairment at each financial year end to establish whether there is any objective evidence for impairment as a result of one or more events ( loss events ) having occurred and which have an impact on the estimated future cash flows of the financial assets. For financial assets carried at amortised cost, impairment losses are measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. (f) Interest expense Interest expense is recognised in the consolidated statement of comprehensive income as it accrues, using the effective interest method of the instrument calculated at the acquisition or origination date. Interest expense includes the amortisation of any discount or premium, transaction costs or other differences between the initial carrying amount of an interestbearing instrument and its amount at maturity calculated on an effective interest rate basis. (g) Unit prices The unit price is based on unit price accounting outlined in the Trust s Constitution and Product Disclosure Statement. (h) Distributions In accordance with the Trust s Constitution, the Trust has the discretion to distribute its distributable income to unitholders by cash or reinvestment. Distributions are recognised in the Consolidated Statement of Changes in Equity as transactions with owners in their capacity as owners. From 1 July 2017, distributions to property development units and management company units can only be done through cash distributions due to the withdrawal of the Product Disclosure Statements. From 1 May 2018, distributions to income units and growth units can only be done through cash distributions due to the withdrawal of the Product Disclosure Statements. (i) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to cash and which are subject to an insignificant risk of changes in value. Page 18