The Sectional Title Schemes Act requires schemes to have a levy and collect the money on behalf of the body corporate. The fees are levied to pay the expenses that the body corporate incurs for day-to-day operations, insurance, security, maintenance and enhancements.
What is the process of creating the budget?
If the sectional title scheme is brand new, there will be a need for a brand-new budget. Most managing agents will be able to assist with a basic budget and assist in implementing it. For sectional title schemes that have been running for a while, there should be a budget already in place for the current (or previous year). This is generally used as a base for the new year.
Every year an auditor is appointed for the financial year. An auditor is a ‘policeman’ who checks to confirm that the finances have been handled legally and professionally. Once the auditor has checked out that all is well, the budget work can get going.
What affects budget/levy increases?
Every year’s budget isn’t necessarily the same. Some years there will be expensive maintenance that needs to happen such as repainting of the block, repaving or waterproofing. In other years, it might be strictly cosmetic. There are however some elements that stay on the budget. This might include lift maintenance, gardening services and rates and taxes. But even these are prone to increases.
Here are some factors that affect the budget and increases:
- Inflation
- Service providers and part increases – including lifts, servicing of fire hydrants, electricity, rates and taxes
- Maintenance – the 10-year maintenance plan explains what needs to be done. If there is a big expense scheduled during the next period, the amount might be increased
- Legally binding fees – certain fees are legally payable such as insurance on the block and CSOS levies
- Issues in the block that require work to resolve – this includes security, emergency maintenance, and long term sustainability projects such as solar electricity implementation
Deciding on what goes into the budget
With all this information involved, we can now get cracking on the budget. The managing agent and trustees will use the projections to adjust all the elements in the budget so that they fit. The trustees and the managing agent work together to compile a budget.
Who decides what the levy of each flat/property should be?
With a sectional title scheme, the whole scheme is one block. This one block is then divided into sections. This is generally expressed as a unit of one (1). The owners would own a section of 1. For example, two owners could mean that each owner owns 0.5. Where there are 10 owners, each owner owns 0.1 of the scheme.
When there are larger flats, they would own a larger stake in the scheme. For example, if there are 8 units with 2 being double the size, we would have 6 units owning 0.1 each and 2 units owning 0.2 each.
The budget is split according to the size of your unit. If you have a bigger unit, then you will need to pay a bigger chunk of the budget.
Who creates the budget?
Depending on the structure of the scheme, different people will be involved in creating the budget. If a scheme is self-managed, the trustees together with the person who manages the finances will draw up the budget. If there is a managing agent, the agent will draw up the budget. In both cases, there will be a trustee meeting focusing on the budget.
In one case where the block was self-managed, I saw that the auditor, together with the financial person draw up the budget together. Personally, I find this odd, as you shouldn’t have the “policeman” have authority over budgets and money spent.
Who approves the budget?
The managing agent and trustees will work on the budget and refine it until it’s suitable for presentation at the AGM. They will then present the budget to the owners at the AGM. Legally, the annual general meeting (AGM) of a body corporate is required to be held within four months following the end of the financial year. The budget will need to be approved at the AGM. The owners have the ultimate say in the approval of the budget. They still have the right to vote to remove or add extra items on the budget.
I am the chairman of a block of flats. Last year, the AGM voted to hire a managing agent and increase the insurance. This had an impact of a 12% increase in levies. The owners gave the trustees the right to increase the levies accordingly.
Special levies
In some cases, the body corporate does not have enough money to pay for an important expense such as a huge issue with internal water pipes. As this is an unforeseen expense that was not budgeted for and needs to be paid, a special levy is declared and the owners will need to foot the bill. A special levy does not need the consent of any or all owners.
According to Paddocks, For a special levy to be legal, the following need to apply:
- The trustees need to pass a written trustee resolution to raise such contributions
- The expense needs to be necessary
- It needs to be an urgent expense that cannot wait
Therefore, a special contribution may not be used only to make the financials look better.
The reserve fund
The Act states that a scheme needs to have a 10-year maintenance plan. This plan will set out what needs to happen every year in the upkeep and maintenance of the scheme’s common property. This might include repaving the parkway, waterproofing, painting and replacing the plumbing. To calculate the reserve fund levies, we need to use the calculations set out in the act.
If the body corporate’s reserve fund is
- …less than 25% of the levy income generated during that year, a reserve amount equal to 15% of the levy income for the new financial year should be collected.
- …equal to or more than the levy income generated during that year, there is no need to add a reserve fund levy
- …more than 25% but less than 100% of the levy income in that year, levies must be added for the amount equal to the repairs and maintenance items provided for in the new budget.
In my experience, I find that it’s safer to have more money in the reserve fund than too little. Special levies are really a terrible thing, especially if it’s not budgeted for by the owners.
Conclusion
The managing agent and trustees are generally responsible for setting up the budget. The budget will then be approved by the owners at the AGM. The budget is split according to property/unit size. this means that some owners with larger properties will pay a higher levy.
Special levies need to be urgent and necessary and no provisions must’ve been made in the current budget for the work that needs to be done.
The reserve fund is a legal requirement. The body corporate needs to pay to maintain the property, as defined in their 10-year maintenance plan. Ideally, the body corporate would want to avoid special levies and make sure that the property is well maintained and the upkeep is done as needed.
Happy investing!
