14 Oct Budgets
Good budgeting is essential to the smooth running of an owners corporation.
Why have a budget?
An owners corporation has a number of obligations including:
- maintaining common property and services;
- in most instances insuring all of the buildings including owners lots;
- administering the owners corporation such as maintaining accounting records.
How is it funded?
The owners corporation looks to members to fund its obligations. Very few owners corporation have a source of funds outside of its members.
What does the annual budget comprehend?
At the annual general meeting the owners corporation determines the budget intended to meet the annual recurrent expenses of the owners corporation.
What factors affect the budget?
Some of the matters which affect the budget include:
- insurance premium – the more extensive the building, the higher the premium;
- the age of the property which it maintains;
- extent of common property;
- installed services such as lifts, security systems, fire services or swimming pool;
- complying with statutory obligations such Occupational Health & Safety.
Why do budgets vary between owner corporations?
The required service levels which are determined by members. This can result in buildings of similar size, type and style having different budgets.
Does an owners corporation require a surplus?
An owners corporation should have an accumulated surplus which can be used fund unexpected expenditure, at least in the short term.
Why Special Levies?
Special levies may be struck for works not comprehended by the annual budget.
These are usually for capital works such as fencing, replacement of gutters and downpipes, major roof repairs and the like.
A special levy is raised to meet the cost of any works not comprehended by the annual budget. A levy notice is issued, and members are required to pay this prior to the work being undertaken. This is to ensure that there will be funds on hand pay the contractor on completion of the work.
There may be occasions when a levy may be struck after the works, such as an emergency replacement of a broken sewer.
A special levy of more than twice the budget requires approval by special resolution. Below that amount it can be approved by ordinary resolution or by the committee.
If an owners corporation has a deficit for the year (the expenditure for the year exceeds the annual budget) it needs to raise a special levy to meet the shortfall. The annual budget also needs to be increased if the recurrent level of expenditure will persist.
How a special levy is apportioned?
The starting point is special levies are apportioned on lot liability as for the budget.
The Benefit Principle
The legislation provides for an alternative apportionment of special levies which is known as the benefit principle.
If an owners corporation is raising a special levy for:
- repairs maintenance or other works;
- which benefit one or some but not all lots;
- the levy is recovered from those benefiting lots;
- with the lots benefiting more paying more.
It is a matter for the owners corporation or committee to determine if the benefit principle is applicable.
Is a special levy always required for capital works?
If an owners corporation has sufficient accumulated funds it may be able to meet some or all the cost of works. A levy will only be required for the amount not met by the accumulated funds.
If an owners corporation exhausts its accumulated surplus it will need to raise a levy for other works that may arise.
Can an owners corporation borrow to meet the cost of works?
There are number of financial institutions who will lend to owners corporation for capital works.
Lenders usually require the owners corporation pass a special resolution to authorise entering into a loan.
If a loan is taken out, the annual budget is increased by an amount sufficient to meet the repayments.