I 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.
Unless stated otherwise all the information on this website relates to Queensland legislation.
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.
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.
Hi Lisa,
there is going one motion on the AGM = admin. found budget plus levies.
The committee has limit for spending $8.200 (41x$200) and the major limit is $10,000.
In the budget is a sum for Maintenance Garden and Ground $12,000.
There is not any extra motion
I would like to know, whether the committee can spend $12,000, which is over the committee limit and the major limit.
I am confused.
Many thanks Lisa.
Jirina
Hi Jirina
The budgeted amounts are sums of the expected expenditure for the entire year.
So for instance, say the scheme has a gardener come in once a fortnight and do various chores at a cost of $250 a time. Each of those individual amounts of $250 add up to $6,500 for the year. Obviously I don’t know how much your scheme pays for gardening each time but that’s the idea. The budget figure will probably include things like tree trimming, mulching, and even planting as well as regular works.
All these items are individually within the committee spending limit yet collectively the scheme has allowed that they will add up to a maximum of $12,000 for the year.
And one more question Lisa.
Must be any expenditures which are in the budget approved by the committee and recorded as a resolution of voting (on the committee meeting or voting outside of the committee meeting?
Thank you.
Jirina
Hi Jirina
There will be some expenditure, like gardening, but also common property power, maybe common property water, cleaning, body corporate management and whatever common services your scheme has agreed to fund, that doesn’t require any committee motion or VOC. The motion happens when the committee agree to pay a certain amount per service, for a selected number of services.
Any variations to that do need to be minuted. Going back to the gardening example; the gardeners will come every period as requested and complete a routine for a cost. Say mow lawns, weed beds and remove debris for $250 a fortnight (again I have no idea what your scheme does, this is merely an example). If the committee wanted to mulch the gardens they would ask for a quote, likely from their current gardener. Approval of that quote should be minuted, whether by a VOC, line item in a committee meeting minute, or at least an email vote to the BCM saying, yes go ahead at this cost.
I hope that makes sense.
Hi Lisa, yes. It is.
After a few months I go ahead with my other question. Budget has items with figures. During financial year there may be need a new expenditure, which had not been budgeting. How does this expenditure process?
Hi Jirina
Budgets have categories: pool works $5,000, cleaning $10,000 and so on. A body corporate won’t spend $5,000 on the pool in one go. It will be made up of several different invoices over the period of the year totalling a little more and a little less at the end.
If un-budgeted expenditure comes up then, depending on the cost, the body corporate can either steal a little from all the other categories to pay for it or, if the cost is large, call an EGM and raise a special levy to fund.
Thank Lisa. I can see the situation better.
Anyway. Total sinking fund expenditure for this financial year is ZERO. But there have been paid 4 items not budgeting like R&M Building General, income tax, R & M Electrical, R & M Garage Door.
Is it possible to use the fund like that? There is not any committee meeting minutes or VOC record to authorize expenses (what and how much). There are invoices for three items paid through the BCM.
Thank you Lisa.
Hi Jirina
Its unlikely that the expenses were paid without first being authorised by the committee. An yes, the sinking fund can, and pretty much has to be used for items like that.
There will always be small incidentals that get paid from the sinking fund. Issues arise in property. The body corporate has a responsibility to keep the property maintained and safe. That means items need to be dealt with as they arise. Its difficult to budget for things that do not arise.
The cost of a VOC is around $150. It is very common for schemes to ratify expenditure at the next committee meeting rather than hold a VOC. A lot depends here on how much the BCM charges.
Its a good thing that they deal with things as they arise.
Hi Lisa. Believe me. It is reality, NO authorisation for spending (for what and how much in advance…..) in motions by the committee that would be minuted or recorded in VOC and after that record of VOC to confirm on the committee meeting. Just invoices, that have been paid. Many things are not fixed (maintenance). There is a list of items in the safety report from the end of September of last year to solve it, which are not in the budget. Just two of them paid again. One of other issue to fix the pathway is an old issue, a few years. Again. Nothing.
Accommodation module. 41 units, at about 7-8 owners live there, the committee are investors, they meet online. I see one interest.
Last issue I have just found. At the AGM this year has been approved insurance by owners, but with NO premium to authorise it, because the premium had not been included in the motion. I have found that it has been paid for $7.421.82. And $7.000 has been in other motion adopted for insurance levies. Again.
Records of VOC are not up to legislation to send us. Nothing.
The all of my motions I submitted to be put on the agenda of the AGM have not been put there. So it is clear for me, that I have one option only.
Hi Jirina
There is a massive amount of body corporate legislation that needs to be followed. The legislation and Adjudicators who interpret it recognise that the body corporate is often going to make mistakes. In a lot of circumstances Adjudicators will overlook mistakes of a technical nature and decide matters on the substance of what’s going on.
My point being, don’t get too hung up on technicalities. In the long run they’re not going to matter unless the rest of the case has merit. For instance, not having the premium amount in the motion is not going to invalidate the motion. The substance of what was approved is there.
I know Lisa about legislation. And I try to go trough to understand and to fill gaps there. So I am not in rush, but I know, that there are so many problems, I just cant leave. Firstly, I am on the way to go through conciliation. It is a process, which takes time and energy…. Thank you Lisa.
Hi
can I ask…at a budget meeting can voting members not on the committee speak or have input at a budget meeting? There isnt anything I can find in the act to inform me. I thought the budget meeting was an occasion where voting members coming along just listened and didnt speak.(troublesome resident} can u clarify this for me?
Hi Helen
I assume you mean a budget committee meeting? At any committee meeting owners and interested parties are allowed to attend, with appropriate notice, however they have no input to the meeting. Its only at the committee invitation that they are even allowed to speak, and there would never be a situation where they have an opportunity to vote.
Our committee is arguing amongst itself on the legalities of having a surplus to carry over to the new financial year. Some say that we should not have a deficit that it is illegal. But it will definitely be spent in the current year and we will not have a surplus by the end of the current financial year. Appreciate your advice on this matter
Hi Diane
Having a deficit in owners funds is unlawful. This is because deficits are caused by spending more than you’ve raised. If its done by accident, so be it, recover and move on. If its done on purpose then the body corporate is engaging people knowing it will not have enough funds to pay them, which is fraud. Further, a deficit is a debt that must be repaid. The body corporate carrying debt has implications for buyers and sellers. Hence legislation says don’t have deficits, and if you do, repay them immediately.
There is no statue against a surplus, and for the sinking fund especially a surplus is the intention!.
In the administrative fund there is no issues with a surplus. Your committee is viewing this incorrectly. Its not a case of spending the money you’ve raised. The goal of the budgets is to meet the legislative requirement to maintain the body corporate in a working and safe condition. Each year projects are allocated in budget. The scheme should complete those projects. If there are funds left over, and there are works requiring attention that haven’t been budgeted, then the works can be addressed. Bonus! Equally, if there is not enough funds for the next priority works then carrying over a balance will allow more to be accumulated in the next year, when those works can be budgeted, for the same or less levies.
Most bodies corporate will have a balance carried over in the administrative fund because though those funds are not needed right now there are contracts and obligations in place, like insurance or administration agreement, and they will be needed shortly.
Our newly elected Committee at AGM’S sets aside the Sinking Fund 10 year forward professional Surveyed report and inserts a 1 year Sinkng Fund budget that is self serving eg cameras, insulation of top floor units, water ingress repairs to individual units etc
nits etc. The new one yealy rorted budgets get approved at the AGM. It avoids special levies. Is this common place in Body Corporates in Queensland and is it legally allowed and tolerated by the BCCM.
Hi Bill
The committee is required to set a sinking fund budget each year. That’s a one year budget and should include everything they’re planning to spend money on, including allocations for programmed works like painting etc. In best case scenario its hoped that it will line up with the 10 year Sinking Fund Forecast.
The Forecast is only programmed works though, and most strata schemes will do other things, like water ingress repairs or refurbishments. For that reason there is no requirement to follow the Sinking Fund Forecast.
In an ideal world a scheme will calculate how much the forecast says to raise for programmed works, add in how much they need for un-forecast works and raise that amount of sinking fund contributions.
Anything that wasn’t planned in that yearly budget is considered unbudgeted works and should be paid by raising a special levy. That isn’t always possible or even financially viable however.
HI Lisa
This is an issue about reporting on balances in the sinking fund and administration fund. Our BCM sends a consolidated report and refuses to split the funds , so I can’t see which fund the money is going in and out of and there is no split of levy payments to the administration fund or sinking fund. Is this correct
Hi MAP
No, there should be division between administrative and sinking fund expenditure and the body corporate does need to account for this.
Can a body corporate keep funds which have not been used during one year (due to drought for example), in the sinking fund for future years when more funds might be needed (due to rainy seasons)again?
We live in an estate and the debate goes on about slashing the common areas more often in wet seasons, and putting money for those seasons away during dry seasons when maybe only one mow is required instead of 4 or 5 (which would be the case in wet seasons).
Our treasurer says we are a non-profit organisation and can’t carry funds over.
I can’t believe that this might be true.
Hi Petra
It sounds like these works might be paid from the administrative fund. In that case the Treasurer is correct. The body corporate should estimate costs for the year only, and collect only that much. The administrative fund is designed to be zeroed each year.
Capital works are paid from the sinking fund which is in essence the savings account.
If there are pending major capital works as part of unforeseen maintenance how can this be included as a motion in the AGM to avoid an EGM later. No engineer or builder quotes have been identified, and no clear costs. A special levy to be raised as unbudgeted.
Hi Nicole
The motions are often included to authorise committee to act as quotes etc become available. You’re correct however that this is not strictly in accordance with legislation. Whether it would be enough to meet requirements is a question for an Adjudicator.
If you have concerns consider discussing with your committee. You may need to make an Adjudication application on the matter if things are proceeding without appropriate clarity and when disputes arise you must be able to demonstrate that you have tried to self resolve matters first.
Good afternoon,
Can be on the sinking fund budget item Income Tax Expense?
(We have Interest as Income from term deposit of Sinking fund.)
The second question is, is correctly budgeted in Sinking fund budget
Gardens – Ground, Plumbing – Drainage works, Building Repairs – Maintenance?
These items wit fund are also in Admin budget. Why they are in both budgets?
Thank you.
Hi Helena
Yes, tax expense is a normal sinking fund budget item. The body corporate needs to pay tax on income, even if it is only interest received.
The administrative and sinking funds have different functions. The administrative fund is for ongoing maintenance items whilst the sinking fund is for capital works. Expenses are categorised and paid from different funds depending on the nature of the works and how they’re coded.
An example would be wash down of the building exterior and cleaning of windows at the same time. The building wash down would be a capital expense paid from sinking funds as its purpose is to extend the life of the paint, whereas washing windows is an ongoing maintenance matter and should be paid from administrative funds.
Whether expenditure is capital or maintenance is always up for interpretation which is why most strata managers will have an Accountant make the call. From my example above I already see how you could argue that the washdown is also maintenance as well. Capital works are those works that improve. Maintenance works are those that maintain.
Thank you Lisa. Such a great explanation.