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  • #8897
    Whale
    Flatchatter

      Some of you may remember an earlier post of mine about a friend who sought some advice about his possible purchase of a strata property. To refresh memories, the circumstances were that the Strata Report commissioned by his Conveyancer revealed a significant deficit in the administrative fund, that had been addressed by paying some expenses of that fund from the sinking fund.

      This matter and some others of equal significance led me to advise against purchase, but my friend extracted a reduction in the purchase price from the vendor, who obviously wanted out of the whole mess, and then proceeded with his purchase.

      Again of the basis of my advice and as the “disbursement” from the sinking fund occurred 8 months ago, my friend has been pushing his Strata Manager to convene a General Meeting so that the Owners Corporation can comply with the requirements under S71(3) of the NSW Strata Schemes Management Act (SCMA) where it has only 3 months from the date of the “disbursement” to devise and implement a plan to recoup that over whatever period of time is considered by the O/C to be acceptable; all things considered (such as not increasing the amount of levies too much).

      My understanding is that the amount to be recouped under S71(3) has to be in accordance with S76(1), then the amounts levied need to be paid to the administrative fund; correct?

      I’m also of the opinion that the amounts recouped would simply be added to the administrative fund levy as paid by each owner, and that as they’d be additional to whatever amounts had been estimated to cover normal administrative fund expenses, then the resultant surplus would at the O/C’s direction transferred to the sinking fund at year’s end; correct?

      Despite my friend’s requests (via me) for the Strata Managers to word the applicable motion around the above, they’ve chosen to put one that seeks the O/C’s consent to recoup the disbursement via a once-off Special Levy!

      We’re talking about almost $40K here, and apart from the fact that my friend and no doubt the other Owners will baulk at what’s proposed (≈$1,300ea), I’m of the opinion that under S76(4) a Special Levy is (only) to account for an expense that the O/C cannot then meet from either its administrative or sinking funds, and not to recoup a distribution from one fund to another as that’s not an expense; correct?

      Apologies in advance, but I need some clarification here so that I don’t lead my friend up the wrong path (his EGM’s this friday).

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    • #18791
      Sir Humphrey
      Strataguru

        It sounds to me, without knowing exact details, that the appropriate thing is to have this general meeting to approve a special levy to deal with the admin fund deficit/repay the sinking fund. Then, I would expect, with everything square again, when the time for the regular AGM comes around again, there would be a normal budget resolution at that AGM to approve the next year’s budget and raise a levy sufficient to cover that, or possibly a little more than just cover it, to build up a little reserve in the bank to cover cash flow through the year of routine, anticipated expenses.

        It is not always necessary to levy an amount to exactly equal the budget. Sometimes you might have money left over from the previous year and a more than sufficient reserve in the bank and could levy a bit less than the budget. Other times you might levy a bit more than the budget to build up a comfortable reserve if the previous year went over budget a bit, eating into reserves. Our strata manager once advised aiming for 25% of a typical annual budget in the admin fund just kept in the bank to cover imperfect matching of the timing of income and expenses. I have tended to err on the side of caution and we have had around 33% in reserve in the admin fund. This year our proposed budget is balanced but the last couple of years we budgeted for slight deficits (levied slightly less than the budget) as we had more than needed in that reserve. 

        The sinking fund is separate and should not be dipped into to deal with day to day cash flow. 

         

        #18794
        Kangaroo
        Flatchatter

          Whale,

          Thanks for providing a different perspective on this question.

          Most SMs go by two inviolate (according to them) commandments:

          1) A deficit must be corrected by the imposition of a Special Levy to be paid within 3 months.

          2) All Special Levies must be paid into the Admin Fund.

          Having re-read those sections of the Act at your instigation, I agree your interpretation is valid, if that is what your OC chooses to do.

          IMHO:

          S76(4) specifies the only case where the OC must impose a Special Levy, and then it must be paid into the Admin Fund.

          That does not preclude an OC resolving to collect a Special Levy for other reasons (such as filling an Admin Fund deficit even though your total funds are adequate to cover cash flow) or to collect a Special Levy to be paid into the Sinking Fund (to cover an upcoming, but not yet incurred, large expense).

          I agree with you that S71(3) really only says you have to make a determination how the OC will address the deficit, and that does not preclude that determination being, for instance, that from the next AGM the normal  Admin Fund Levy will be temporarily increased by $20,000 per year for the following two years.

          #18796
          scotlandx
          Strataguru

            I think you’re right Whale, the admin and sinking funds are used for different purposes and a special levy is not the correct way to do it.

            A special levy is to meet a future expense that has not been otherwise budgeted for, this could be a range of things, but here administration expenses from the previous year exceeded what was budgeted, i.e. they are replenishing funds already spent.

            If the admin fund was short and had to be topped up from the sinking fund, then this suggests that the budgeting for the scheme hasn’t been done very well, $40,000 is a significant shortfall.

            What they should be doing is just raising the levies for the coming year and making the $40,000 component payable in the next levy payment.  That is different from a special levy.  People often get confused about what a special levy is, and this situation demonstrates that.

            #18797
            Whale
            Flatchatter
            Chat-starter

              THANK YOU SCOTTY!!!

              Your post just landed ahead of mine but …..

              Thanks Peter and Kanga – I’m coming from an angle based on my interpretation of the S76(4), whereby a Special Levy is to be raised (only) in circumstances where an expense arises, the payment of which “cannot at once be met from either fund”.

              Again based on my interpretation, an amount to be raised in order to recoup a distribution from one fund to another is not an expense of the type to which a Special Levy may be applied.

              In my opinion, what should happen is for the administrative fund levies to be set at an amount sufficient to meet the expected expenses of that fund PLUS an amount sufficient to recoup the past distributions from the sinking fund.

              As Peter said that would produce a “reserve”, which would in the case of my friend’s Plan be transferred to the sinking fund to recoup those past distributions, and depending upon how his O/C resolved to “determine” under S71(3), that could be a once-off recoup or comprise several such recoups over a number of years in order to ease the pain.

              Am I up the wrong tree of what?

              #18809

              I don’t think you can recoup money transferred from the sinking fund in accordance with s71(2) via a levy to the Admin Fund. This would not be addressing the sinking fund deficit.

              IMO s76 allows the OC to determine levies to both admin and/or sinking fund so long as a budget estimate is agreed to at the same meeting. There is nothing to say that this can not be a resolution to amend the budget (previously passed at the AGM) mid year and subsequently levy an additional sinking fund contribution (or increase the current contributions) to pay back the money transferred.

              This gets us around the messy business of transferring a “surplus” from the admin fund to the sinking fund. BTW – s72 deals with how to distribute surplus funds. They should be paid back to the owners in proportion according to unit entitlement and via passing a unanimous resolution.

              I believe it follows that transferring a “surplus” from the admin fund to the sinking fund should be by way of budgeting a future deficit in the admin fund and increase the sinking fund by that same amount.

              #18822
              Whale
              Flatchatter
              Chat-starter

                You know how it feels when you think that you’ve got it right even though one of the biggest strata managers in NSW has taken a different (incorrect) approach; thanks everyone!

                (by the way JGOWI, you’re right but I’m talking about a transfer of the surplus in one fund to another fund, not a distribution of that surplus to proprietors).

                #18824
                Kangaroo
                Flatchatter

                  @Whale said:

                  Thanks Peter and Kanga – I’m coming from an angle based on my interpretation of the S76(4), whereby a Special Levy is to be raised (only) in circumstances where an expense arises, the payment of which “cannot at once be met from either fund”.
                   


                  @Whale
                  said:

                  You know how it feels when you think that you’ve got it right even though one of the biggest strata managers in NSW has taken a different (incorrect) approach;

                  I need to get this clear in my own mind too, for a similar situation.

                  My disagreement is with the two words you have inserted in brackets.

                  Just because the Act specifies a situation where you must impose a Special Levy does not mean that is the only situation where the OC may decide to have one. That make the SM’s proposal a viable alternative but not incorrect. But their assertion that it is the only solution is incorrect.

                  IMHO, your proposal is also legal and viable (if you have cash flow).

                  And what owner would not prefer the time-payment approach rather than an immediate large Special Levy?

                  Are we on the same page?

                  #18825
                  Whale
                  Flatchatter
                  Chat-starter

                    Kanga – As you may have gathered I’m a “black or white” person, and therefore in my opinion the SCMA and other Legislation sets out how certain issues must be handled; that is strictly in accordance with the procedures shown.

                    If there were other options available then they’d be shown in the applicable provisions, although I agree it would be better if ambiguity could be avoided so that matters don’t go pear-shaped when people innocently interpret.

                    Probably enough on this topic for now, so again many thanks to everyone!

                    #18888
                    Anonymous

                      @Kangaroo said:
                      Whale,

                      Thanks for providing a different perspective on this question.

                      Most SMs go by two inviolate (according to them) commandments:

                      1) A deficit must be corrected by the imposition of a Special Levy to be paid within 3 months.

                      2) All Special Levies must be paid into the Admin Fund.

                      Having re-read those sections of the Act at your instigation, I agree your interpretation is valid, if that is what your OC chooses to do.

                      IMHO:

                      S76(4) specifies the only case where the OC must impose a Special Levy, and then it must be paid into the Admin Fund.

                      That does not preclude an OC resolving to collect a Special Levy for other reasons (such as filling an Admin Fund deficit even though your total funds are adequate to cover cash flow) or to collect a Special Levy to be paid into the Sinking Fund (to cover an upcoming, but not yet incurred, large expense).

                      I agree with you that S71(3) really only says you have to make a determination how the OC will address the deficit, and that does not preclude that determination being, for instance, that from the next AGM the normal  Admin Fund Levy will be temporarily increased by $20,000 per year for the following two years.

                      It is the case the OC can deal with the deficit created by a transfer over a period. In SCS 12/40868 Member Goldstein had no issue with the SP recouping the transferred (to fill a deficit) amount of $8309 over a ten year period (in a large SP). In the same matter it was highlighted the OC had made no attempt to pass a resolution to recoup the transferred money for over a year, the matter of the transfer was not addresses for over twelve months, that drew no comment.
                      As much as the Act says do this and do that do not lose sight of the fact that most of the Act is directory, not mandatory.

                      #18890
                      Jimmy-T
                      Keymaster

                        If I can jump in here, there are a lot of very informal arrangements going around whereby the Admin fund borrows from the Sinking fund and then pays the money back withing the deadline, only to “borrow” it again.

                        This can continue ad infinitum until
                        a) a new EC is elected and goes WTF?
                        b) an owner wants the books in order before they sell
                        c) the sinking fund is needed and the biscuit tin is empty.

                        This is obviously not a good situation but there are those (like Lannocks, sponsors of this website) who think the correct mix is a minimal sinking fun for emergencies and either strata loans or special levies for work as and when its needed.

                        I think the question of where money from special levies gets paid is moot. If the admin fund has a debt owed to the sinking fund then you pay your special levy or strata loan into the admin fund and transfer it to the sinking fund.  It’s not rocket surgery.

                        And as for the legality of all this – the StrataKops (Forensic Accounting Division) is currently overworked analysing the links between developers and the NSW Labor Party.  As my friends in the criminal fraternity love to say, it’s only a crime if you get caught. 

                         

                        The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.
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