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How levies are set

How Levies are set

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All levies in Queensland follow three different categories. The administrative fund levy, the sinking fund levy, and the insurance fund levy. This article is a transcript of a recent podcast by Strata Operations Manager Matthew Savage, covering the topic of how levies are set.

Check out our Complete Guide to Body Corporate Levies

Administrative fund levy

This is probably the easiest fund to understand, but with the most confusing name. It should really be called the ‘running costs fund’ or the ‘annual maintenance fund’, or something like that. This levy is calculated through the preparation of a yearly budget by the body corporate committee, with the guidance of the body corporate manager.  It looks at all the costs the body corporate will incur in that financial year, adds them together, and divides by the number of items.

There’s really no secret magic in the administrative fund. It’s simply a matter of adding up all the costs, and then dividing it by the number of people who pay these costs, and that works out at the rate which owners pay to keep the building operating.

What does the administrative fund levy pay for

Most of the costs you would pay in a household environment are also paid in a body corporate. So the administrative fund will pay for things like water for the common property, electricity, if you’ve got an onsite management agreement it would pay for the remuneration of the onsite manager.

It pays for tools – fuel for the lawn mower, mulch for the gardens, fertilizer, pool cleaning, pool chemicals, and lift servicing. Anything that’s an ongoing cost that provides maintenance to the common property is paid from the administrative fund.

Probably the biggest misunderstanding is because it has the word administrative in it. A lot of lot owners think this is a fee to pay the body corporate manager to do the administrative work. Yes, we do an administrative job, but the administrative levy wording comes from the legislation and is different from the work a body corporate manager does.

One of the costs a body corporate does pay is for a body corporate manager. They do the accounting and secretarial, or ‘administrative work’, and that is paid out of the administrative fund, but it’s generally quite a small portion of what the administrative fund is collecting for.

So that’s why ‘annual running costs’ would be a better way to describe the administrative levy, but unfortunately, we’re stuck with the name the legislation has chosen.

Why would the administrative fund levy increase?

In terms of trends in the administrative fund levy, because it’s paying annual running costs, if the spending is stable – so if the building is generally doing the same thing this year as it did last year, then you would expect the administrative fund levy to generally rise with inflation.

Inflation, as I’m sure we all know lately, is the increasing costs of the same goods and services over time, and the body corporate is exposed to that same pressure just like everyone else. Generally, these costs rise each year.

When owners see their administrative fund levy increasing by 3% or 5% that doesn’t mean the body corporate is going crazy and wasting their money. It just means the things the body corporate is purchasing and providing to the site have risen in cost in line with the general economy.

Administrative funds fising outside of inflation

It’s normal for administrative fund levies to rise generally with inflation, however, when they do change outside of inflation is because the body corporate has altered things. For example, if the body corporate has a gardening contractor coming once a month and lot owners are complaining the gardens aren’t looking nice, the body corporate might decide to increase their gardening frequency to once every fortnight. That would double the number of gardening services in a 12-month period and so the cost of gardening would double. That would in turn increase the administrative fund levy as a direct result of a change the body corporate has made.

Of course, on the flip side, you would expect the property would look better and rental and sale prices would increase in line with those improvements.

Another trend we see is that smaller buildings are generally more easily influenced by price rises. If you think about a block of six units, it has a much smaller budget and therefore the gardening bill or the electricity bill as a proportion of its total spending is much higher.

Administrative funds and smaller lot schemes

Another trend we see is that smaller buildings are generally more easily influenced by price rises. If you think about a block of six units, it has a much smaller budget and therefore the gardening bill or the electricity bill as a proportion of its total spending is much higher.

If the electricity price rises by 20%, this would have a bigger impact on a smaller building’s administrative fund levy than a bigger building.

A larger building would obviously have a much higher electricity bill in the first place – so a 20% rise in electricity would still be a significant increase, but it would be one of many other costs that would generally stay the same.

A lot of owners intuitively believe because their building is small, levies should therefore be stable and stay lower than in a larger building. But what small buildings don’t have is the economy of scale of their costs. So, it’s often the other way around, where small buildings are more exposed than big buildings.

Insurance Levy

This is the easiest one as the insurance levy simply pays for the costs of the building’s insurance policy. In most schemes in Queensland the body corporate will provide building insurance for the building, not the contents of course, but the building insurance. If the building has an insurance levy, that insurance levy should closely match the amount of money the body corporate will spend on its insurance policy.

The insurance levy is sometimes separate. Yes, it’s an administrative cost because it’s an annual cost, but it’s often separated because the way the insurance levy is calculated based on induvial lots can be different from the administrative and sinking fund levies.

When something’s calculated on a different ratio system, it must be separated as a different levy. That’s why some buildings will have an insurance levy and some won’t. If you don’t see an insurance levy, it’s generally included in the administrative fund levy and paid on the same ratio system as that.

Sinking fund levy

It’s important to understand that the administrative fund levy and the insurance fund levy are linked to the body corporate’s spending in that year. So, whatever the body corporate is spending, it needs to essentially raise that amount of income, or it will go backward. The sinking fund levies however, are not linked to the current year’s spending.

The sinking fund is a savings fund and it’s a long-term savings fund.

No different to households, if you’re saving up to buy a new car or to do a renovation, you’re saving money every year, even if you’re not actually spending the money in that year.

The concept of savings is it gets bigger over time. We do see a lot of comments raised on the sinking fund levies asking, ‘what are you spending that on?’. This isn’t the right question, because the body corporate’s not spending the sinking fund money, it’s just raising it.

The sinking fund as forced savings

The sinking fund is really forced savings as a group, and the idea behind it is that if a body corporate didn’t have a sinking fund and expensive things needed to be done on the property, it would be very difficult to get owners to pay lump sums of 10 or 20,000 dollars at a time.

Instead, the law requires owners to pay a little bit of money every year, so when the body corporate does need to spend it, it’s got all or most of it in a bank account.

The sinking fund levy is based on a 10-year projection of capital costs. It’s not just a ‘made-up’ figure. It’s based on a quantity surveyor’s report essentially saying, ‘over the next 10 years the building needs to spend say $100,000, on painting, resurfacing the driveway, and replacing the lift’. The sinking fund levy is the combination of all those projects and the annual levies required to fulfil them.

How is the sinking fund levy calculated?

The sinking fund levy is based on a 10-year projection of capital costs. It’s not just a ‘made-up’ figure. It’s based on a quantity surveyor’s report essentially saying, ‘over the next 10 years the building needs to spend say $100,000, on painting, resurfacing the driveway, and replacing the lift’. The sinking fund levy is the combination of all those projects and the annual levies required to fulfil them.

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