"Strata wouldn't be Strata without levies but they are a critical and essential part of ensuring you protect the value of your property. They have been, are and always will be a major component of strata life and there wouldn't be a Strata Scheme anywhere that could survive long term without the money received from Strata Levies. The Levies must be determined and administered by the Owners Corporation with levy notices being issued on a regular basis. Here's an idea of what's involved in the whole process."
Everyone is still trying to come to grips with exactly how the NEW legislation changes (that came into effect on Nov 30, 2016) will affect our strata lives and some companies may be a little slow changing some of their webpages, forms and articles to reflect the new laws.
So please be a little patient if some of the links I give you refer back to some old legislation or have simply disappeared.
I have to have SOME faith so I'm hoping most will update their info as soon as possible. Eventually everyone will be on the same page but it could take just a little time. Just know that I will be keeping my ear to the ground for changes...and that I will do my best to fix what I can as soon as I can.
All Strata Schemes impose a regular strata levy, usually collected quarterly, on all the lot owners. The money collected is deposited into the strata scheme's trust account and is then used to fund the running and maintaining of the strata scheme. To help workout what money goes where, the strata scheme's bank account is effectively split into 2 funds - one for the day-to-day running of the scheme and the other to cover the large capital expenditure items plus the occasional 'emergency' type item. I'll provide more detail on these 2 funds in the section on Strata Levy Types just below.
Without sufficient levy payments a Strata Scheme wouldn't be able to pay those running costs resulting in a slowly deteriorating complex and a subsequent drop in the market value of every property in the scheme. Just as a car needs regular servicing and maintenance to remain trouble-free, a Strata Scheme also requires on-going 'maintenance and attention' to many of the parts that makeup the complex.......
It's interesting to note that the amount of money sitting in a scheme's bank account usually can be a decent indicator of what type of future will be faced by scheme's lot owners. If an examination of the account shows that available funding is sufficient to meet anticipated ongoing running, repair and maintenance costs (plus some in reserve for emergencies) then all is well and good. However, if the account is low on funds or, worse still, empty then the future may be a bleak one.
There are three types of Strata Levies:
The Administrative Fund, under the control of the Owners Corporation, is used to pay for all the 'day-to-day' and 'regular' expenses of a Strata Scheme and is funded by the quarterly levies.
Things like (but not limited to):
The Capital Works Fund, also under the control of the Owners Corporation, is essentially a large capital expenditure fund that pays for both expected (long term) and unexpected replacement, repairs and maintenance. Some things, such as carpet replacement in stairwells, common property painting and the like are easy to budget for....but other things like 'concrete cancer' or 'structural damage due to subsidence or an accident' are very difficult to predict and therefore budget for. Nevertheless, it's advisable to put some money away for the 'unexpected emergencies' that WILL crop up from time to time.
Working out just how much to allocate towards these unexpected events is not an easy task and this is where the help of some experienced and knowledgeable people is required to ensure the Capital Works Fund does what it's supposed to.
Example of Capital Works Fund Levies
The Capital Works Fund Plan shows that $150,000 is needed over ten years.
The amount required to cover these expected expenses is $15,000 for each year of the 10 year period.
To meet the $15,000 per year needed, contributions would be levied according to the unit entitlement of each lot.
If there were 30 lots in the scheme and each lot had the same unit entitlement, each owner would be required to contribute $500 per year to the Capital Works Fund. This $500 translates to $125 per quarter for each lot owner.
Of course this example does not take into account any unexpected or emergency type expenses that may arise during the 10 year period prior to any yearly review done at the Annual General Meeting.
Before the current legislation came into force on November 30th 2016, it WAS quite common for many schemes to avoid 'looking to the future'. These schemes tended to minimise or even totally neglect their Capital Works Funds to the detriment of all the owners in the scheme.
Eventually, the time would come when something simply had to be either replaced or repaired but there were no funds in the Capital Works Fund to do the job. The Owners Corporation therefore had no other option but to raise a Special Levy asking for enough money to fix whatever had to be fixed. Well - no more!!
Thankfully, the latest piece of legislation (NSW SSMA 2015 Section 80-OC to prepare 10-year capital works fund plan) goes a long way to help stop this damaging practice as the 10-year Capital Works Fund Plan MUST be prepared for a 10-year period commencing on the First Annual General Meeting. This plan details how any future major 'renewal, repair or replacement' works for the scheme will be funded and over what time frame - and the plan is the 'schedule' for this. The Owners Corporation is responsible for creating, reviewing and maintaining this plan and a full review must be done every 5 years. The 10-year plan must be put in as an item on the Annual General Meeting agenda each year (for discussion and updating if needed). The money for expected works is held in the Capital Works Fund and comes from the quarterly Levies.
IMPORTANT TIP - It's always very sensible to allocate extra funds to the Capital Works Fund to cover those unexpected repairs that WILL eventually turn up and usually at the worst possible times. By handling the Capital Works Fund properly, the lot owners of the scheme may never have to face the dreaded Special Levy - since sufficient funds should always be available - unless you are very unlucky and have a lot of unexpected events one after the other.
Another great reference document to have a look at is NSW Fair Trading's information page on Levies and Capital Works Funds. It covers some of the more interesting aspects regarding what happens if an Owners Corporation doesn't comply with the requirements and what concerned owners can do about that. Also don't miss NSW Fair Trading's OTHER information page on Buying into a Strata Scheme - Levies. It's part of a much larger report but has 3 smaller sections on levies.
NSW Strata Schemes Management Act 2015 sections dealing with the CWF
- Section 79: Estimates to be prepared of contributions to CWF
- Section 80: Owners corporation to prepare 10-year CWF plan
- Section 74: Capital Works Fund
- Section 76: Use of CWF for purposes of other fund
NSW Strata Schemes Management Regulation 2016 regulations dealing with the CWF
With the advent of the compulsory 10-year Capital Works Fund Plan legislation, 2-lot schemes can be exempt from doing the plan if it was decided by the Owners Corporation NOT to setup a Capital Works Fund in the first place, otherwise the 10-year plan will have to be done.
Basically the legislation states that if the buildings in the 2-lot scheme are physically detached from each other, the owners can decide NOT to have a Capital Works Fund provided there are no additional buildings or common property in the scheme. Both owners must decide this by unanimous resolution at a general meeting.
(See SSMA 2015 - Section 74) - specifically Part 5.
Another condition regarding the funds is the transferring of money from the admin fund to the capital works fund and vice-versa. The legislation states that the transferring is for schemes with MORE than 2 lots so it does NOT seem to apply to 2-lot schemes. I can understand this if there is NO Capital Works Fund to start with but what if there is one? Then again, it doesn't say you CAN'T do the transfer...hhhmmm Oh yeah - and any funds transferred must be paid back within 3 months.
(See SSMA 2015 - Section 76). See what you think...
A Special Levy is raised when there aren't enough funds in either the Administrative Fund OR the Capital Works Fund to pay for an essential expense. However, not all expenses are essential and many non-essential expenses can be postponed until enough funds are raised via the normal quarterly levy receipts. But, ALWAYS keep in mind the WHS (Work Health & Safety) implications of NOT fixing something. If there's ANY possibility of any danger to anyone then make sure it IS fixed because the penalties AND the risks for not doing so are simply too great.
Examples of non-essential expenses could be the painting of the common property's external walls, replacing the 'tired' carpets in stairwells or adding extra landscaping to the scheme's garden area. Conversely, fire safety compliance or repairing damage to the scheme's main driveway would be two examples of essential items.
I have yet to meet an owner who likes to receive a Special levy so it's important to be aware that, eventually, there will be things that will need repairing or replacing. But, if enough money hasn't been raised along the way, Special Levies WILL be required.
Legislation (See SSMA 2015 - Section 76) states that in the situation where there IS enough money in the scheme's bank account to pay for an essential expense but the particular fund required to pay the expense doesn't have sufficient money available, the Owners Corporation is permitted to pay for the expense with money from the other fund - for example: paying an Administrative Fund expense from the Capital Works Fund - provided the amount paid is repaid within 3 months by way of a special levy.
Why must it be paid back? - because paying the expense out of other fund effectively results in the original fund going into deficit and, under current NSW Strata legislation, "any deficit must be cleared by the raising of a special levy no later than 3 months after such deficit occurring".
2-lot schemes are mentioned in this piece of legislation regarding the transferring of money between the 2 funds so look at my section on 2-lot scheme conditions (which is just above) for the details.
If required, this 'deficit' levy (or any other special levy) can be financed via a Strata finance loan. See the next section on "Alternative ways to pay" for more details.
Many Strata Schemes, for a variety of reasons, may find themselves in the position where money is desperately needed to pay for essential repairs or renovations but the bank account is 'bare'. Now, when this situation occurs there are a couple of options open to the Owners Corporation including:
While the idea of taking out a loan may seem abhorrent to many, it might just be the best (and sometimes ONLY) solution to ensure the work actually gets done before the problem gets any worse and more than likely resulting in a 'cost blowout'. If left unchecked, and the problem involves WHS concerns, it could develop into something even worse - perhaps even litigation due to negligence along with heavy penalties from Workcover prosecution - and no one wants any of that. Yes, interest on the loan must be paid but at least the necessary works are done, the dreaded Special levy is avoided and everyone is safe from harm.
To get the full rundown on this 'ever increasingly popular' option, read my information page on Strata Finance Loans.
The Owners Corporation must determine what both the Administrative and Capital Works Fund levies will be for the scheme on an annual basis. The amounts decided upon must be supported by a budget AND the Capital Works Fund 10-year plan which must be presented at each Annual General Meeting. All the owners can then vote to either accept or reject the proposed budget which must take into account actual and expected expenditure as well as the existing financial situation of the Owners Corporation.
The levy amount set is payable by every owner based on the unit entitlement of each lot. Basically, the larger the unit entitlement of a lot, the greater the portion of the levy amount to be paid by the respective owner.
Levies are usually payable quarterly and a levy notice is issued by the treasurer of the Owners Corporation or by the Strata Manager, if one has been engaged to look after the scheme. The treasurer also must maintain a Levy Register of all levies received. Full details of what information needs to be held in the register is in the Strata Schemes Management Regulation 2016 - Regulation 23. There's also more information in Strata Schemes Management Act 2016 - Section 99.
For brand new schemes the Owners Corporation must make its first determination of levies within 14 days from when the Strata Scheme is registered. From then on, levies are generally determined at each annual general meeting as per all Strata Schemes.
When the scheme is new, a budget must be produced by the original owner (usually the developer) and that budget must be supported by an Initial Maintenance Schedule (IMS). The IMS must include everything at the property that needs maintenance so it SHOULD be very comprehensive. Under the latest legislation the owners corporation can seek compensation via NCAT if the tribunal determines that the projected levies were unrealistic.
NSW Fair Trading has a very informative information page on the Initial Maintenance Schedule which gives you a great rundown on the IMS.
For more details refer to
NOTE - Initially, when a scheme is very new, it can be difficult to accurately determine the correct amount for the levies. As time passes, there can be all sorts of expenses that suddenly appear because no one didn't think of them when the initial 'budget' was done. This is, unfortunately, difficult to avoid. So, for those of you involved in new schemes, be prepared for the initial levy amount to increase as a truer pattern of expenses begins to develop.
At least now, with the latest legislation, the developer has to try really hard to make the initial levies as accurate as possible and lot owners have some sort of comeback if something is not quite right.
TIP - Professional Strata Managers, usually with many years experience in setting levies for new schemes, will probably get a lot closer to the true level from the very start.
Believe it or not, there are still some selfish owners out there who simply will not pay their levies....but the laws are pretty watertight on levy payment compliance and the authorities frown heavily on those who default.
However, the road to 'recovery of the unpaid funds' can be a long one but eventually, especially if the defaulter is forced to sell their property, you should get all that's owed and, possibly, any costs you incurred along the way. In the meantime, you must ensure your scheme remains financial until the defaulter is brought to justice. Just make sure you don't give up the chase too early or too easily!!
Still, regardless of your best efforts, some others are either a little more stubborn (or desperate) and more forceful ways will be needed. Many Strata Managing Agents have developed their own effective ways, over many years, of dealing with these sorts of issues so seek their help. If your one of the 'self-managed' schemes, things can get a little tougher as you'll need to work out what actions you need to take to recover the funds.
Prior to 2010, owners corporation approval at a general meeting was required if legal action was needed to be taken to bring some of the 'levy rogues' into line. This created all sorts of unnecessary time and money costs for everybody involved. Well, now "any legal action taken to recover overdue levies will no longer need to be approved by an owners corporation at a general meeting if the cost is estimated at less than $3,000". All I can say here is: "And about time too".
To learn more about the various ways to try and solve the problem of owners who won't pay, have a read of the Resolving disputes information page. It might just help you in some of the more 'problem' cases.
An unpaid levy attracts interest at the rate of 10% simple interest a year if not paid within one month after it's due and, sometimes, this penalty alone can be enough to bring some of the slow payers into line. Interestingly (excuse the pun), the owners corporation cannot increase or decrease the interest charged but it can make a special resolution at a general meeting to charge no interest. I'm sure there ARE certain situations when this applies but, in most circumstances, I expect the 10% to be charged.
Many times too, a simple discussion with the offender(s) can result in both parties agreeing to the setting up of a payment plan allowing the defaulters to catch up over a number of months. It's amazing what a little bit of negotiating and understanding can do here.
As I just mentioned, the Owners Corporation can now setup a Payment Plan for those lot owners who are behind in their levies. The plan can be over a maximum of 12 months with the ability to be extended if needed. The strata committee, at the request of the owner who took out the plan, must give that lot owner a written statement every calendar month (or longer if requested) of what's been paid, what's outstanding and any interest that's owing.
The current legislation details the requirements of the payment plan and you can read about them by following the links just below but here's a quick rundown as to what needs to be in the payment plan:
NSW SSMA 2015 sections dealing with the Unpaid Levies and Payment Plans
- Section 84: Liability of persons other than owners for contributions
- Section 85: Interest, discounts on contributions and payment plans
- Section 86: Recovery of unpaid contributions and interest
NSW SSMR 2016 regulations dealing with the Unpaid Levies and Payment Plans
Here are a few extra resources to help you understand levies even more along with some other relevant and important information that also might prove useful.
Information pages, booklets, publications
- Levies and Capital Works Fund
(NSW Fair Trading)
- Strata Living booklet: Refer to Managing Finances section on Page 18
(NSW Fair Trading)
- Where Do My Levies Go?
(a nice concise summary by SSKB Strata)
- FactSheet: Your Strata Levies
(there's lots here to browse so click on the NSW section - which is down the page a little)
If you need to know the meaning of one or more of the common terms mentioned above then have a look at the Strata Terms and Jargon Information page.
Buying a Strata Title Property
Community & Neighbourhoods
Home Warranty Insurance
Levies & Special Levies
Records & Accounts
Small & Large Schemes
Strata Finance Loans
Strata Trades Guide
Taxation & GST
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