Body corporate fees (levies) are the life blood of every body corporate scheme. Therefore, if you own a body corporate property, or are considering buying into a body corporate development, it is important that you understand body corporate financials. This guide will cover:
- Explanation of body corporate contributions (levies)
- Different types of funds
- How budgets are set
- What influences the levies
What are body corporate fees (levies)?
Body corporate contributions or more commonly, body corporate levies, pay for the operation of the body corporate which maintains and manages the common property and shared areas in your community titles scheme.
A body corporate is considered a not-for-profit organisation by the Australian Taxation Office. This is because the body corporate is funded entirely by its members (the owners of each property), and the purpose of the body corporate is to provide services to those members.
Think of a body corporate as a club in which owners of properties in the development pool resources, time and knowledge for the shared benefit of the entire development. The body corporate is the legal and financial entity which enables that to occur.
Levies are collected based on annual budgets, and are often divided up into quarterly or 6-monthly periods to provide regular cash flow into the body corporate.
The levies are collected into different funds, which each have a separate and distinct purpose under the legislation. All bodies corporate have an administrative fund and a sinking fund, but may also have other funds depending on the type of scheme and its individual operations.
The administrative fund is a general-purpose fund which provides for the annual operating costs of the body corporate. Think of this as the running costs fund.
Common costs paid out of the administrative fund include:
- On-site building manager/caretaker
- Grounds and garden maintenance
- Tax & tax return costs
- Legal fees
- Body corporate management costs
- Registration or compliance fees (e.g. lift registration, pool safety certificate)
- Swimming pool maintenance
- Consultant’s advice
- Insurance valuations
- Compliance reporting (e.g. WHS and fire)
- Fire equipment service contract
- Garage door/gate service contract
- Lift service contract
- Plumbing repairs
- Electrical repairs
- Repairs and maintenance of any type
The administrative fund does not pay for capital work or capital expenses for the common property.
The sinking fund is a special-purpose fund which provides for the anticipated major work and capital improvement work for a building.
Below are some examples of common capital work paid from the sinking fund:
- Driveway resurfacing
- Structural underpinning
- Physical or chemical termite barrier installation
- Pool resurfacing
- Pool equipment replacement
- BBQ area furniture replacement
- Garden overhaul with new plants and design
- Replacing fencing
- Replacing carpets in common areas
- Foyer renovation
Who is required to pay body corporate levies?
All lot owners are required to pay body corporate levies to fund the operation of their body corporate.
When a buyer purchases a lot in a community titles scheme, the purchaser becomes responsible for payment of levies from their settlement date.
Who sets the body corporate levies?
Levies are set at each annual general meeting (AGM) by the owners who choose to vote at that meeting. Levies are approved by a simple majority of owners who vote.
The levies are set based on budgets, and those are included with the AGM paperwork for owners to read.
How are levy amounts decided in the budget process?
Each body corporate has a budget for each fund type for each financial year. The body corporate manager assists the committee to prepare the budget for each year. Budgeting for the administrative and sinking funds are quite different, as the reason for each fund is different.
Administrative fund budget
The administrative fund budget is prepared based on the anticipated costs for that particular financial year. As the administrative fund is not a savings fund, the budget generally does not into the future for costs which are beyond the current financial year.
The administrative fund budget is quite detailed, and each budget item is based on either an ongoing cost arrangement, or a proposal to spend money in the financial year. See below for some examples of the calculations which inform the budget:
The administrative fund budget is a total of each individual budget item within the administrative fund.
The budget must also take into account whether the costs for last year were over or under budget.
Last year costs over budget
Budgeting for a 12-month period takes skill, but also relies on certain assumptions and predictions about the coming year. Generally when the body corporate is larger and more complex, the variables involved in the budget are more substantial and can impact the budget.
The body corporate may exceed its annual administrative fund budget for a number of reasons:
- Committee decision mid-year to do additional work
- Changes to government or other fees or charges
- Increased water or electricity consumption
- Changes to insurance market
- Additional unexpected repairs and maintenance on buildings and equipment
When the body corporate’s expenditure exceeds the budget, it creates a budget deficit. For example if the body corporate spent $5,000 more than its budget in one financial year, the budget for the next financial year would need to change so that:
- The $5,000 deficit from the last year was collected
- The costs (if they continue at the higher rates) are covered by the new year budget.
Last year costs under budget
If the body corporate saves money in a particular year, it may end the year under-budget – creating a budget surplus. Sometimes this is the result of genuine savings (for example we may assist by negotiating new pricing for energy or other services), or it may be a result of timing. For instance, the body corporate may defer its gutter cleaning until before storm season – pushing that maintenance task from one financial year into the next financial year.
The budget surplus is automatically moved forward into the next financial year, and can be applied to reduce the next year’s levies. In some cases a surplus gained can be maintained over several years to assist to keep levies following a stable trajectory.
Sinking fund budget
The sinking fund budget is effectively a savings fund for future work, and so it should not be set only based on spending for the budget year.
The general goal of the sinking fund is to allow the body corporate to pay for all capital improvements and replacements as they become due, without needing to either take a loan, or issue a special levy to owners.
The body corporate is required by law to have a detailed report of the elements of the building and common property that require investment. This is called a sinking fund forecast.
The sinking fund forecast is generally prepared by a quantity surveyor, and includes an anticipated timeframe for the capital improvement and replacement of all elements of the building. For example fence replacement may be 10 years away, and pool resurfacing may be 16 years away.
The forecast then takes each element into account to prepare a cash-flow recommendation. The sinking fund forecast also takes inflation and cost increases over time into account, and provides a recommended levy amount for the sinking fund each year.
The legislation recognises that the body corporate may need to deviate from its sinking fund forecast by spending money out of sequence (for example if an element deteriorates faster or slower than predicted). For this reason, the sinking fund forecast is required to be updated generally every 5 years.
What are the major factors in administrative fund levy changes?
Body corporate levies directly pay for the running costs for the body corporate. Like most costs, the operating and maintenance costs generally increase over time.
For example: Electrical repair costs will generally increase as the labour rates for electricians gradually increase over time.
It is reasonable to expect levies to generally increase roughly in line with the increase in the cost of living or inflation (referred to as CPI).
There are however a number of other factors which can contribute to the cost of levies in a significant way:
The onsite facilities generally are a key feature of the lifestyle and value of your body corporate, but they also impact the cost of levies. Facilities like pools, gym, sauna, spa, lifts and other recreational amenities generally attract:
- Additional management costs from your on-site manager/caretaker
- Additional repair and maintenance costs for the plumbing, electrical and machinery components of those services
- Additional registration and compliance costs. For example all lifts in Queensland must be registered with the government with an annual fee based on the type of lift and how many levels it travels.
The size, structure, location and age of the scheme
Sometimes larger schemes with more amenities can have cheaper levies than smaller and simpler schemes. The reason for this is simple economies of scale, the cost is shared by more owners and thus reducing the levies for each owner.
Consider this simple example:
There are two neighboring buildings with 50 units each. Each owner therefore pays 1/50th of the total costs for their building.
One building has one lift, the other building has 2 lifts. The building with two lifts will generally have higher levies even if the buildings are otherwise very similar. There are more costs distributed over the same number of owners.
If the building with 2 lifts had 60 apartments instead of 50, it would still only need 2 lifts, but those costs would be spread over an additional 10 owners. That would reduce levies for each owner without increasing the number of lifts or their servicing or registration costs.
If the larger building also gained a swimming pool but had 80 apartments, those levies might still be lower, once you take into account the greater number of people sharing the payment of those costs.
It is a common misconception that very small schemes should have cheap levies. In many cases the levies increase as the size of the scheme reduces.
For example, a 4-unit building may still have the same sized roof and gardens as a 6-unit building. In that case the 4-unit building would be more expensive for each owner as there are 50% fewer owners to share in the costs, which may be quite similar overall.
The structure of the scheme also plays a role in the cost of the levies. A high-rise building with 200 apartments will have very different building features, services and costs to a 200-townhouse development in a gated community.
Generally, maintenance costs increase with the age of a building. Even buildings kept in good condition by their body corporate typically face increasing maintenance costs as elements of the building reach their end of life.