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Passing the buck when there’s no bucks to pass

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In these straitened times, with so many apartment owners and renters suffering severe financial stress, the buck – or lack of bucks – often stops with the owners corporation or body corporate.

Whatever the reasons owner-occupiers or landlords have for being short of cash – and in a lot of cases it’s because their tenants can’t afford their rent, if they can’t pay their levies, it rapidly becomes their strata scheme’s problem. 

Bearing in mind that strata expenses may have gone up due to more people working from home with the knock-on effect of increased demands for cleaning common property, this could be a financial crisis with imminent consequences.

And while there are procedures for recovering the unpaid levies, these take time.

Less empathic strata committees, will try to head off financial shortfalls by warning owners that there will be no leeway on late levies or fees, when it comes to penalty interests and debt recovery. 

It doesn’t do much for a sense of community but it might reduce the danger of the strata scheme running out of money.

Also high is the temptation to dip into the maintenance, capital works or sinking funds (different names, same things) to keep the scheme functioning until the levies hole is filled.

Sinking funds are the unloved step-children of strata finances. Historically, strata owners would neglect maintenance and repairs, leaving them to the next owners.

As apartment blocks crumbled, various states brought in legislation to encourage  current owners to pre-pay their share of future repairs and maintenance.

In NSW, Queensland and WA, all schemes larger than two lots must have 10-year plans to estimate when things are going to start falling apart and how much it will cost to fix them, and owners must set levies or fees to meet the demands anticipated in the plan. 

However, while maintenance plans can be prepared by a professional, they can also be created by an ordinary committee member who, you’d think, might err on the side of parsimony.

In Victoria, only “prescribed” buildings of over 100 units or with an annual turnover of more than $200,000, must have a maintenance plan.  However, any buildings with such a  plan, regardless of the size, must collect fees to cover the anticipated costs.

In South Australia, the  law hints rather than demands that cash be set aside for future maintenance.

Anyway, all over Australia, there are pots of money that have been set aside for future rainy days while many of us are in the midst of a financial cyclone. So can the admin fund – which pays daily expenses – borrow from the sinking fund?

In Queensland, that’s a categorical “no”.  On several on-line factsheets you’ll find reminders that money can’t be transferred from one fund to another.

In Victoria, the legislation says that sinking funds can only pay for items listed in the maintenance plan, except for exceptional circumstances that must be approved by a special resolution (with no more than 25 per cent of all owners against). 

Whether or not those exceptions include a loan to the admin fund is not spelled out.

In NSW, the admin fun can borrow from the capital works fun provided that, within three months, the strata committee makes an arrangement to pay it back. Note the wording, they only have to agree on an arrangement, so creative accounting, paper transfers and re-borrowing are rife.

However, all said and done, nobody’s going to be jailed for transferring funds from one pot to another, and no strata manager is likely to lose their licence for allowing it.

Whether or not it’s financially astute is a whole other question.

A version of this column first appeared in the Australian Financial Review.

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