A common complaint in sectional title schemes is that the trustees increased the levy by XYZ ridiculous percentage. But is this in fact the case? How is the inevitable levy increase worked out and by whom?
The proposed budget
The process begins when the trustees – or the managing agent on behalf of or on the instruction of the trustees – prepare the budget for the coming financial year. Both the Sectional Titles Act and the prescribed rules are quite specific about how this must be done and the kinds of expenses that must be considered. The Act mentions repair, upkeep, local authority charges, electric current, water, insurance premiums and other expenses. The relevant rule specifies an itemised estimate of anticipated income and expenses.
This raises the first important point about levy increases: The budget must be itemised. The trustees, with or without the managing agent’s assistance, must estimate what amount is necessary for the management of the scheme and the maintenance of the common property and they must include these items in the budget. They must estimate as closely as possible what each one of these items is going to cost. They should obtain quotations for as many of these items as possible: insurance, garden services, security services etc. A few of the line items may be uncertain: water and electricity increases and the knock on effect of fuel price increases, for example, but these expenses must be estimated as accurately as possible.
Increase should not be based on a fixed percentage
It’s no good thumb sucking a percentage increase or basing it on the latest Consumer Price Index. It’s almost inevitable that there is going to be an increase and of course that increase can be expressed as a percentage of the previous levy but a percentage is not the basis upon which the levy must be increased. The itemised estimate approach explained above is the way that the total budget should be calculated. Not simply suggesting a percentage increase. Simply suggesting that the levy be increased by a certain percentage without estimating each line item may well be asking for a shortfall towards the end of the coming financial year.
Owners approve the budget upon which levies are raised
The proposed budget is sent out with the notice of the Annual General Meeting so that the owners can study it and prepare any questions or comments they might have. At the AGM the budget is considered and approved by the owners. It can be approved in its original form or in a modified form, which raises the second important point. The owners have the opportunity to change that budget – they have control!
Trustee resolution necessary for legal liability
The remainder of the process is pretty much automatic: The trustees must meet and raise the levy and they do this by taking a formal trustee resolution. It is a vital part of the process because taking the trustee resolution is the action that makes the owners legally liable to pay the levy. The trustees must then apply the participation quotas [or section 32(4) rule if there is one] to the total budget amount required for the new financial year to establish the amount each owner must pay, and in what instalments, and then inform each owner in writing of their levy obligations. This process must be completed within fourteen days of the AGM. This is also the time in which the trustees should set the rate of interest on arrear levies if they have not done so previously.
In a properly run scheme it is the owners who take the decision that actually increases the levy they must pay through the approval of the budget at the AGM. Owners need to understand this process so that they realise how important it is to attend the AGM and be part of the decision making that directly affects their pockets!
Article by Anton Kelly – Paddocks Press: Volume 8, Issue 9, Page 1