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Can a discount be given on levies

Recently an interesting debate occured on the Discussion Forum of the Paddocks Club – www.paddocksclub.co.za.

The question was raised if a discount can be given on levies to which Prof. Graham Paddock replied that there is nothing in the Sectional Titles Act to prevent this. His suggestion was that the amounts of levy discounts should be reasonable in the circumstance and that the likely extent and timing of discounts should be taken into account in the annual budgeting process, not introduced by the Trustees in the course of a financial year.

It was then queried whether it should be recorded in the Management or in the Conduct Rules of the scheme – and if it is a Body Corporate or Trustee decision to be made.  Prof. Paddock replied that no special rule is required but that the proposed discount and its effect should be a clearly evident part of the budget proposed by the Trustees, circulated to owners with the notice of the AGM and approved by owners by majority vote at the AGM.

Another member of the club then raised the issue that the Body Corporate will then have a shortfall on the budget – if the approved budget is R1 mil and a discount of 10% is given then there is a potential shortfall of R100 000.  This has to be found somewhere or some corners will have to be cut on some items (usually maintenance).  The member suggested that it can only work if the prepaid portion is invested and the income on that equates to the discount, but this could have a possible tax implication.  Prof. Paddock replied that his understanding is that if you allow discounts you have to include those as a variable expense item in the budget and that he is no accountant, but he knows that this form of incentive is legislated for and works in practice in other jurisdictions.

Another member then stated that it will be a complicated accounting and recordkeeping process if discounts are given – for example if the levy is R2000 and 1% discount is given if the levy is paid in advance, is it worth the extra cost of the accounting and recordkeeping exercise.  Prof. Paddock replied that there is no doubt that discounts will complicate the bookkeeping process.  It has to however be kept in mind that discounts does not have to be percentages calculated over time, they can be fixed amounts encouraging payment before a fixed date or , in the case of instalments, dates.

The question was then raised by another member if the principle of discounting levies is not effectively a partial refund and then in conflict with Prescribed Management Rule 45(1):
The owners shall not be entitled to a refund of contributions lawfully levied upon them and duly paid by them.
Other members then jumped in to say that a refund is something you get after you have paid the full levy – therefore a discount cannot be seen as a refund in terms of this Management Rule.

The opinion was raised by some members that anything that will improve the collection of levies should be welcomed.  To which one of the members commented if the simplest way of encouraging payment of levies in advance will not be to pay interest on the amounts in credit.  The comment was made that one should be associated with the FSB (Financial Servcies Board) to be able to pay interest.  It was also stated that even if it was possible you are going to have to make it an attractive proposition – even if you make it interest of 10% per year and a monthly levy of R1000 is paid in advance the approximate interest will be only R50.

A suggestion was then made by another member to reverse the order and say that the levy payable for the year is Rx and that owners who would like to choose a payment plan option to pay it off over 12 months will pay interest at the rate as determined per year.  That would be less labour intensive to manage.  Many members were of the opinion that this is the best suggestion made.  The comment was made that owners have different types of cash flows, some work and are paid on a weekly or monthly basis, others earn large commissions that fluctuate and they do not have a steady monthly income, while a lot of owners live off their investments such as owning shares listed on the stock market and receive dividends once or twice a year.  Being able to pay levies in advanced at a reduced rate would then be a win-win for the body corporate and the owner.  And in this way the Body Corporate receives all the income budgeted for and the interest paid is an added bonus.  The only danger is that a healthy bank balance needs tight financial control to avoid the temptation of spending funds in hand that are earmarked for budgetary requirements still to be met.

Written by Karien Coetzee (National Property Management Consultant)

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