This article about the emergency response measures for financial management of Bodies Corporate has been supplied by QIA Group.
Temporary Amendment to the Body Corporate and Community Management Act 1997
The Queensland Government has introduced the Justice and Other Legislation (COVID-19 Emergency Response) Amendment Act 2020 which temporarily amends the Body Corporate and Community Management Act 1997 until 31 December 2020.
The purpose of the amendment is to provide measures to alleviate the financial burden caused by COVID-19 on bodies corporate and their Owners. This includes the ability to change due dates of levies, removing interest on overdue levies, removing the obligation to commence levy recovery proceedings, easing borrowing regulations, and perhaps the most significant – to adjust the Sinking Fund Budget to provide levy relief to Owners.
Sinking Fund Budget Adjustments
The amendment allows a body corporate, by ordinary resolution, to adjust the Sinking Fund Budget for the current financial year (body corporate financial year) to remove or reduce forecast capital works expenditure which could therefore reduce levies for the current financial year.
However, the amendment requires a body corporate to refund Owners any contributions they have paid towards items that are removed or reduced from the Sinking Fund Budget (a professionally prepared Sinking Fund Plan that shows itemised accruals would help with that). This means that Owners could receive both a temporary levy reduction and a levy refund. While this may sound tempting to some Owners, it could deplete the Sinking Fund leading to significant levy increases in future years.
Is the Solution Worse Than the Problem?
As the amendment is temporary, it’s important to understand that any items which are removed or reduced from this financial year’s Sinking Fund Budget, will need to be reinstated into the next year’s budget, and accordingly, any levies that are refunded will need to be repaid to fund the reinstated capital works projects.
Although the intention of this amendment is to provide temporary levy relief for the current financial year, if items are removed from the budget and refunds given, it may cause levy stress in the next financial year when those items are reinstated and need to be funded again.
If you are half way through funding a 10 year / $40,000 capital works project, Owners would need to be refunded the $20,000 which has been paid to date, if the item was removed from the Sinking Fund Budget. However, when the item is reinstated in next year’s budget there will now only be 4 years left to raise the $40,000 required meaning that Owners would need to pay $10,000 per year towards this project rather than the $4,000 per year they had previously been contributing.
Is There a Better Solution?
Each item in your budget, and when it’s scheduled to occur, was carefully considered when the approved budget was prepared. If items are removed or the schedule changed, this may lead to degradation of the property or increased costs. Accordingly, we believe the best way to provide Owners with temporary levy relief is not necessarily to remove items from the Sinking Fund Plan or change when they occur but rather to change how it is funded by reviewing the existing budget and performing a Levy Reset.
What is a Levy Reset?
It’s a low-cost way to review your existing Sinking Fund Plan with the aim of reducing your levies as much as practically and responsibly possible, in the short term, without it impacting on the long-term maintenance of your property.
The goal is to ensure that sufficient funds are available for any critical or immediate capital works, while temporarily deferring the levies associated with long term capital works projects. This provides immediate levy relief for the current financial year while also avoiding any sudden or significant future levy shocks, as the costs are gradually reabsorbed over multiple years.
For example – if your property is painted every 10 years, you would normally budget for 10% (1/10th) of the cost in each year’s levies. However, if the levies associated with painting were deferred for 1 year, they would then need to increase to 11% (1/9th) for the remaining 9 years to ensure sufficient funds are available to perform the painting as scheduled.
This means that capital works projects do not have to be removed from the Sinking Fund Budget or rescheduled, allowing the property to be maintained as planned. It also means the impact to future levies is minimal (e.g. increasing from 10% to 11% in the painting example above).
As a Levy Reset is an interim measure until your next Sinking Fund Plan is due, it is ideally suited for properties that are within the first 3 years of their existing Sinking Fund Plan. If you are in year 4 or 5 of your existing Sinking Fund Plan, you could request a new Sinking Fund Plan be performed with a focus on providing temporary levy relief.
Could We Pay No Levies for a Period of Time?
In a similar way to being ahead on your mortgage and being able to defer loan repayments, if you have sufficient funds to cover any necessary capital works, that are due in the short term, it may be possible to defer your levies for a period of time, but only if it’s practical and responsible to do so – i.e. it won’t affect any critical capital works. In many cases, urgent or high priority capital works still need to go ahead, and therefore still need to be funded, so it may not be possible to defer all levies, but it may be possible to reduce them significantly for the current financial year.
Online Budget Planner
When you order a Sinking Fund Plan or a Levy Reset from QIA Group, you also qualify for a 12 month free subscription to our Online Budget Planner – a powerful online tool that allows Strata Managers and authorised Owners to review and refine their Sinking Fund Plan, and see in real time, what impact any changes would have on their levies (see the Online Budget Planner price list for more information).
This post appears in Strata News #366.
Have a question about budget plan levy resets or something to add to the article? Leave a comment below.
- QLD: Is Your Body Corporate Overcharging?
- QLD: Q&A Freezing Levy Payments to Protest Bad Service
- QLD: Q&A Levy Increases – As Lot Owners, Can We Refuse?
Looking for strata information concerning your state? For state-specific strata information, take a look here.