How A Body Corporate Budget is Set and Changed

body corporate budgetI recently received the following excellent question from Frank:

I’ve just bought a unit and am confused about the budget-setting that you mentioned. Who sets the proposed budget for the AGM? The committee? he treasurer? The body corporate manager?
And what if the meeting wanted to increase the proposed budget by, say, 15% because of some issue that arose after the proposed budget was framed? Would an EGM be needed for that too?

Setting the annual budget is a function of the committee and as with most things body corporate there’s a specific way it’s meant to happen.

After the end of financial year the body corporate has three months within which to hold the Annual General Meeting. That three months has a specific purpose. It’s intended that:

  • The body corporate prepare the annual financial statements
  • Those statements are audited (unless a motion not to audit was resolved at the last AGM)
  • A draft budget is prepared
  • The committee meet at the Budget Committee Meeting and finalise a budget for the next financial year
  • The completed financial statements and budget are included in the Notice of Meeting for the AGM which must be received three clear weeks prior to the meeting

In practice it’s the body corporate manager who does the majority of the heavy lifting here. It is in fact one of their core functions.

They will prepare the statements, have them audited if required, and then prepare the budget.

How A Body Corporate Budget is Prepared

Administrative Fund Budget

Calculating the administrative fund budget is done just as you or I would calculate our own budgets.

Start with the actual figures from the previous year.

Separate out the ongoing financial commitments (eg electricity, manager etc) and factor in an increase if required.

Subtract from last years actual figures anything you won’t need to do again this year.

Decide what you’d like to do this year and forecast a cost.

Add it all up and you have the budget.

Divide by the period and you have the levy issue, taking into a account any pre issue levies.

The body corporate manager isn’t working in a vacuum here. Good committees are active committees and there are usually numerous projects around the property that have been identified as requiring attention and funds.

The committee will have given a broad strokes outline of what is to be included in the budget and that could be anything from a minor work like trimming trees to a full major renovation or defect rectification works.

Sinking Fund Budget

Strata schemes are required to collect funds for future capital works. To help them do that they’re required to have an estimate of outgoings with a minimum time horizon of ten years.

Estimating the amount to collect for capital works is a job that’s, usually, best outsourced to a professional quantity surveyor. The scheme does that by having a Sinking Fund Forecast (SFF) prepared.

SFF’s are nifty documents. They have three key parts:

  • The estimated expenditure including how much and when to spend it
  • The estimated balance of the fund year to year
  • A table of levies to collect year to year

When a SFF is prepared the quantity surveyor works out a plan to manage the expected capital works around the scheme along with a plan of how to fund those works. It’s a comprehensive plan.

All committees and managers need to do to set the sinking fund levy is follow the plan, factoring in any outgoings required in the current financial year.

It’s Not As Simple As It Seems

I’ve made that seem really simple, because that is the theory.

Keep in mind that committees and body corporate managers may be dealing with large budgets, sometimes into the millions of dollars, and buildings that can be incredibly complex. Even just ascertaining the source of a problem or issue can be overwhelmingly difficult, let alone structuring a solution.

The other key aspect of budgets is that some people are better than others when it comes to setting and sticking to budgets and that translates to bodies corporate as well.

The Budget Committee Meeting

The body corporate manager is employed to take care of the administrative paperwork and preparing the budget is part of that.

But don’t be misled: The committee are in charge.

The draft budget is presented to the committee at the Budget Committee Meeting.

The committee will then proceed to pull it apart, query everything and tinker with the figures. The committee are still lot owners and whatever budget they come up with they’ll be expected to pay as well. There is considerable downward pressure on levies and the budget is the key tool for amendment.

The second function of the Budget Committee Meeting is to put forward the motions for the upcoming AGM and the budget plays an integral part of that. Some expenditure will be outside the committee spending limit and will require approval by the combined lot owners via separate motions.

If all goes well at the end of the Budget Committee Meeting an agreed upon plan of action has been formed, the budget finalised along with the statutory and committee motions for the upcoming AGM.

Accepting Budgets at the AGM

The proposing of budgets and setting of levies is a statutory motion, meaning that it must be put forward at every AGM.

There should be two motions though often they’re combined into one.

The first motion is to accept the budget.

The second motion is to accept the levies issues. Legislation requires that producing a budget is not enough. The lot owners must have set out for them exactly how much they’re required to pay along with dates they’re required to pay.

Owners have a couple of choices here. They may:

  • Vote yes and accept the budget and levies as is
  • Vote no, sending the committee back to the drawing board
  • Vote to amend the budgets by a maximum of 10%

If the scheme votes yes then those are the levies for the next financial year. The incoming committee also have a plan on what to do.

Voting no is far more problematic and in most cases will simply incur extra expense for the lot owners.

Legislation allows that the lot owners may adjust the levies, at the AGM, by a maximum of 10%, either up or down.

Making adjustments to the levies can only be done by those attending the AGM, since a vote from the floor must be made.

When it comes time to vote on the motion to accept the levies a lot owner may raise a motion to adjust the levies. That motion is then voted on by those at the meeting and, if passed, effectively makes the postal votes cast on the unchanged motion invalid.

It’s important to note that a motion to change the levies can’t be made simply because owners think the amounts are too high or too low. “I don’t want to pay that much” is not a good enough excuse to use this rule. The objection should be specific, for instance, “I do not agree to spend $10,000 in a year to mow our tiny front lawn”.

It’s also important to note that if a motion to adjust the budget is passed at the AGM the budget does in fact need to be adjusted.

Unexpected Issues During the Year

During the year payments such as those to the Caretaker or the Body Corporate Manager or any entity where a contract setting out terms of payment is in place may be authorised by a committee member.

Everything else requires an approved motion either from the committee or lot owners.

That said the body corporate budget is by no means set in stone and it can be altered at any time.

Indeed the committee, or a lot owner, can submit a new budget at any time, request an EGM and, if the other owners support that budget, change the levies.

That’s exactly what’s supposed to happen when unexpected issues arise throughout the year. The levies collected are to fund the costs and works set out in the budget. Any additional costs are to be funded by way of a special levy.

Actually that’s pretty much the definition of a special levy; A levy to raise funds to finance unbudgeted works.

Conclusion

The thing about everything I’ve written above is that is what the legislation intends.

In reality all sorts of things happen. A committee might not be engaged, the SFF might be complete rubbish, the lot owners might not vote. Any number of circumstances or problems arise and are overcome.

That’s not necessarily a problem though. In this Adjudicators Order it was noted:

Courts have recognised that the very detailed provisions of the applicable regulations make it almost inevitable that there will be failures to comply with the regulations from time to time and courts have always accepted that it is unlikely that it was a purpose of the legislation that an act done in breach of a statutory provision should be invalid if public inconvenience would be a result.

To me that suggests the purpose of actions taken have considerable sway notwithstanding that legislation may be breached by said action. I try to keep that in mind when I’m reviewing budgets and expenditure.

THE BASICS OF BODY CORPORATES

A little knowledge can go a long way


I see so many stressful and frustrating issues in body corporate records that result from simple misunderstandings it hurts my head. If I could do one thing to help it would be to teach everyone the basic rules, so they can avoid all these dramas.


With that in mind I've put together a short eBook that sets out the basics everyone owning in a body corporate really should know. It won't make those big issues go away, but it will give you a firm grounding from which to communicate.


It's completely free, so please, download it now!

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Comments

  1. It is interesting how the body corporate is prepared. It sounds like you have a lot of budgeting that comes together after adding and subtracting different figures that you won’t be needing that year. Do a lot of companies do this or is it vary from company to company?

    • Hi Charles

      This is the process outlined by legislation. This is how its done by most BCMs, with varying degrees of commitment and success and a fair amount of fudging. Straying from the process too far though will open a scheme up to Adjudication and that’s a waste of resources. There’s enough wrangling that happens with groups of people anyway without adding situations where the committee/BCM stray from the legislation.

      • Robert Fleming says:

        Budgeting should not be based on adding or subtracting from the previous year’s figures – zero based budgeting is a much safer and more realistic form of budgeting where each expense is justified for the coming year. This enables each expense to be understood and not just accepted as “well it was spent last year so will be spent this year too”,.This should be done by any progressive Body Corporate.

        • Hi Robert

          Thanks for commenting.

          I disagree. I think that what got spent in the previous year(s) forms much of the basis of what will be spent in the coming years. If you spent $20,000 on common electricity this year its safe to assume you’ll spend a similar amount in the next year unless action has been taken to somehow reduce needs. Zero based budgeting might seem like a good idea but would be impractical to work with. An administrative fund budget that’s been incorrectly calculated is expensive to resolve and can leave buyers and sellers out of pocket through timing issues.

          Also the people who reviewing and approving these things are volunteers and the less demand on their time the better.

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