The basics of body corporate budgeting

Budgeting

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Budgeting is a crucial aspect of managing a body corporate, and the key to ensuring funds are correctly allocated to fairly meet the collective needs of all owners.

In this article, we look at the basics of body corporate budgeting, including how the budgets are prepared and approved to where and how the money is spent.

Fund types: Where the money is spent

In line with the Body Corporate and Community Management Act, every body corporate must maintain two funds: the administrative fund and the sinking fund. These funds serve distinct purposes and are crucial for the ongoing management and maintenance of the property.

Administrative Fund

The administrative fund is primarily used to cover the day-to-day operational expenses of the body corporate. This includes routine day to day maintenance, utility consumption such as water, gas and electricity, insurance premiums, contractual arrangements, professional services like legal and accounting fees and administrative costs, and any other recurrent expenditures necessary for the smooth functioning of the property.

Sinking Fund

In contrast, the sinking fund is earmarked as the body corporate’s savings fund, required for the long-term maintenance and major capital expenditure needs of the property. By setting aside funds in the sinking fund, the body corporate can proactively address anticipated future expenses without resorting to special levies or loans.

See our article sinking and administrative funds explained.

The basics of budgeting

Each financial year, the body corporate is obligated to prepare budgets for both the administrative fund and the sinking fund. These budgets serve as financial roadmaps, outlining the projected income and anticipated expenditure for each fund for the body corporate’s financial year ahead.

They are usually prepared by the committee, with the help of the body corporate manager, and provided to each owner to consider at the AGM. Owners can also propose budgets to the body corporate via a motion at the AGM or EGM.

A budget can be approved by ordinary resolution.

Preparing the administrative fund budget

The administrative fund budget is based on the anticipated costs for that particular financial year. As it is not a savings fund, the budget generally does not include costs beyond the current financial year.

This budget is quite detailed, and each expense is based on either an ongoing cost arrangement or a proposal to spend money.

To finalise the administrative fund budget a body corporate must also consider the closing balance from the previous financial year and the total cost of all budgeted expenses for the next financial year. This goal is for the administrative fund to end as close to nil as possible each financial year.

The amount that each owner contributes to the body corporate levies is directly influenced by the budgets approved by the body corporate. Contributions are typically calculated based on the unit entitlement of each owner, reflecting their proportional share of ownership in the property.

Preparing the sinking fund budget

To effectively create the sinking fund budget, the body corporate requires a sinking fund forecast. This document is required by law, and usually prepared by an independent quantity surveyor. The report identifies all the major elements of the building or common property that will require repair or replacement in the upcoming years, along with estimated costs. 

Its goal is to allow the body corporate to pay for all capital improvements and replacements as they become due, without needing to drastically increase levies, take out a strata loan or issue a special levy to owners.

The forecast considers each anticipated cost, its timeframe, CPI and inflation, and any potential increases to produce a cash-flow recommendation to carry out specified works. The report is used to provide the suggested annual levy amount required each year by the sinking fund to meet these forecasted costs.

The body corporate, usually in conjunction with the body corporate manager, uses the sinking fund forecast to set the sinking fund budget. Once approved, this determines the sinking fund levies paid by each owner in the scheme.

Note: Schemes registered under the Specified Two-lot Schemes Module do not need formal budgets. However, they may agree on certain body corporate expenses to ensure adequate financial management.

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