The Strata Manger's Role in Owners Corporation Finances

The Strata Manager’s Role in Owners
Corporation Finances

© Copyright 2012 Teys Lawyers

www.teyslawyers.com.au

Nobody likes surprises?



A Building Somewhere
• 15 res apartments
• Part of a mixed use
stratum (separate OC’s)
• Balance commercial
and retail lots
• Onsite management
• Res OC levies $1,550
per quarter
• 4 years old


Are the Savings in Line With the Plan?
Year

Plan

Reality

2007

-

-

2008

-

$ 20 000

2009

-

$ 30 000

2010

$ 44 572

$ 26 000

2011

$47 742

-

Balance end 2010

$87 358

$ 61 249


Compliance

(under 41.6%)
( short $ 26,107)
( 29.8 %)


Are Defects Covered by the Budget?
• Reasonable steps
• Best endeavors
• Reasonable care …

All fail the test of strict
liability for repair and
maintenance of
common property in
NSW; Seiwa’s case.


Are the Levies Too Low?
Deficits

Neglect

Crisis


• Administration fund goes into deficit

• Sinking fund not expended “just in time”

• Sinking fund balance short of plan


Is the Administrative Fund Budget Correct?
• Provision for bad debts
and recovery costs?
• Watch for rampant
increases for electricity
and insurance
• Look for a small surplus
each year of about 10%
of income



Is the Sinking Fund Budget Realistic?
• Following the sinking fund
plan + / - 10%?
• Spending according to the
plan?
• Saving according to the
plan?
• Not having a plan is
negligence
• Not following the plan is
negligence


Are Levy Arrears Within Benchmark?
$ Levies > 90 days
Annual admin budget

No. months YTD / 12



What the Arrears Rate Means?
Delinquency performance
ratio

Performance Guide

0%

This mob are all over those levies! But don’t assume
this rate will last for ever – hard times hit owners

5%

Not bad – this is the average – this is a well run OC
within striking distance of out-performing the
industry

10%

Warning bells – this is too high and the committee
should be asking hard questions about the strata
manager’s recovery processes (or lack thereof)

15% +


This building is in strife – this will involve some
serious committee attention to pull back from here if you get on the committee you will have to collect
debts and re-educate your owners immediately


Developers’ Hate Paying Levies
• Strata managers can be
soft on developers
• Serious arrears puts
financial pressure on
the remaining owners
• Consider winding up
proceedings that will
come to the attention
of the developer’s bank


Signs of Good Levy Management
1. Measurement of
delinquencies
2. Written levy collection policy
in place
3. Policy followed consistently
4. Interest charged on
outstanding levies
5. Discount offered for early
payment


Are There Hidden Tax Liabilities?
• Income tax ruling 2505

• Strata entities are treated as
‘public companies’
• Taxed at corporate rate of 30%
• Taxed as a ‘for profit’ company

NOT

• Principal of mutuality applies



Tax is Not Assessable on Mutual Income
• ‘One cannot make a
profit out of oneself’
• Where there are
identical contributors
and participants in
surplus, there is not
assessable income
• Can apply to strata
entities


What Is Mutual Income?
• Administrative fund, sinking
fund and special levies
• Rent by a lot owner for
common property
• Interest for late paid levies



Examples of Non-Mutual Income
ie Assessable
• Interest from a bank
• Access fees from non owners eg
occupants
• Rental income from external
parties
• Profit on the sale of assets to
external parties
• Fees paid on the transfer of
management rights where the
rights are held separately to the
manager’s lot


Have the Expenses Been Apportioned?

Non-mutual income
Total income


Apportionable
expenditure


Mobile Phone Carrier Installation
• Licence fees paid by external
party
• Strata scheme registered in
NSW
• Common property held as
agent
• Income assessable in the
hands of the individual
owners – not assessable to
strata entity


Development and Sale of Common Property
• Common property
developed to produce
new penthouse lots in
NSW
• Common property is vested in the strata entity as agent
for individual owners
• CGT provisions should apply to individual unit holders

• Income assessable to individual unit holders


Selling Solar Generated Electricity
to Defray Levies
• Generates assessable income
• Associated costs are deductible expenses
• Individuals pay tax not the strata entity if Acquired by OC
because common property is held as agent for owners (ATO
private ruling 1011739693623 – May 2011)
• Assessable to owners corporation rather than individuals if
equipment acquired on trust (ATO private ruling
1011830631407 - June 2011)
• No GST


About the Presenter
About the webinar presenter - Michael Teys is the Founder and Principal
Lawyer of TEYS Lawyers. He has a Bachelor of Laws and practices
exclusively in the area of strata title law. He is a Fellow of the Australian
College of Community Association Lawyers. He was formerly an Adjunct
Lecturer with Charles Sturt University. He appears weekly on SKY News
Business Channel's Property Success with Margaret Lomas and is a
regular panellist for the property edition of Your Money, Your Call for the
same channel. You can read Michael’s blog at www.michaelteys.com and
follow him on Twitter at @MichaelTeys.com
Teys Lawyers practice nationally in strata title law representing owners corporations, bodies
corporate and apartment owners. The firm’s practice groups include building defects, strata
community disputes, strata titles property law, by-laws and levy collection.
Subscribe for their free e-newsletter StrataSpace and find out more about them at



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