WA: Q&A Council of Owners Spending Limits and Setting the Budget

This article is about council of owners spending limits and setting the budget.

Table of Contents:

• QUESTION: As treasurer, can I ask owners to pay their levies three months early to pay the insurance bill?
• QUESTION: Our council of owners meets at a bar and, without approval or knowledge of owners, uses owners’ funds to purchase alcohol and snacks. How is this ethical? What approval is required?
• QUESTION: Our Council has taken out a strata loan to cover the cost of the strata insurance renewal. Was the Council legally able to impose the burden of a strata loan upon owners?
• QUESTION: Do funds that constitute emergency spending of up to $500 per lot come from the Admin or the Reserve fund?
• QUESTION: Is there a limit or threshold on Cumulative Budget Surplus in the Admin Fund?
• QUESTION: If the approved budget has a line item for building repairs and maintenance of $10,000, can the COO spend this amount on any building repairs without specifically seeking approval from the Strata Company?
• QUESTION: What is the process for authorising expenditure over budget. How should we deal with expenditure relating to emergency situations?
• QUESTION: Who has the final say over the Council of Owners budget and how monies are expended from an administration account?

Question: As treasurer, can I ask owners to pay their levies three months early to pay the insurance bill?

As the new treasurer of our complex with six owners, I’ve discovered we don’t have enough money in our strata account to cover our building insurance, which is due now. The previous treasurer manipulated the projected figures to make everything appear balanced. They suggest I ask owners to pay their fees three months in advance to ensure we have the necessary funds. This practice has led to a deficit in the past.

Is early payment of levies the best solution? Should I report this issue to the Australian Securities Commission or another authority?

Answer: Seeking early payment of levy contributions by owners to eliminate the shortfall in funds during the year is not ideal, it is a way of stabilising the financial position of the strata scheme.

The requirements under the Strata Titles Act 1985 as amended stipulate that the strata company must prepare and submit a budget for approval to its annual general meeting. The budget must be prepared in accordance with any requirements set out in the regulations and the scheme bylaws – Section 102 (1) and (2).

If a strata company prepares a budget where the levy income is equal to the projected expenses and the ending balance from the financial year before is not sufficient to provide for an adequate cash flow during the year, there is the likelihood that at one stage during the financial year, the currently available funds are not sufficient to cover certain expenses such as the insurance premium. The insurance premium is often a big chunk that needs to come out of the funds compared to other expenditure items.

We do not believe that the strata schemes are governed under the ACCC; while seeking early payment of levy contributions by owners to eliminate the shortfall in funds during the year is not ideal, it is a way of stabilising the financial position of the strata scheme at this point without the need of seeking a special contribution from the owners.

My advice for future budget preparation is to ensure that any projected balance in the funds at the end of the financial year – after taking into consideration the proposed budget and levy contributions – represents a figure similar to or close to the projected insurance premium that will fall due to be paid at one stage during the year. This helps reduce the risk of a shortfall in funds to meet the strata company’s obligations during the year. The treasurer of the strata scheme has, in our opinion, a fiduciary duty to act in the owners’ best interests and to ensure the financial stability of the complex.

This is not being constituted legal advice; we recommend that legal advice be sought should the above response not be applicable in the circumstances.

Marietta Metzger
magixstrata
E: marietta@magixstrata.com.au
P: 08 6559 7498

This post appears in Strata News #692.

Question: Our council of owners meets at a bar and, without approval or knowledge of owners, uses owners’ funds to purchase alcohol and snacks. How is this ethical? What approval is required?

Our council of owners meets without a strata manager at a public venue with a bar. Without owners’ knowledge and approval, they purchase alcohol and snacks during the meetings using owner’s strata company funds. How is this ethical? Is it permitted for the council of owners to use owners’ money to buy alcohol during meetings?

Answer: Some key items need to be noted concerning the council of owners using strata company funds for food/drinks at their meetings.

The council of owners can hold their meetings in a venue that is suitable for them, including a public venue. Generally, however, it is best that the Annual General Meeting is held in a neutral location, such as the strata manager’s offices or a meeting room, to allow for privacy and other voting methods (e.g. electronically or remotely). Some key items need to be noted concerning the council of owners using strata company funds for food/drinks at their meetings. The council of owners must:

1. act honestly, with loyalty and in good faith.
2. exercise a degree of care and diligence.
3. not make improper use of their position to gain advantage or cause detriment to the strata company.
4. inform the council in writing of any direct or indirect conflicts of interest and refrain from voting under such circumstances.

If the council of owners is using strata funds for personal food and drinks instead of covering venue booking costs, it raises a concern about their adherence to the above guidelines. Furthermore, if there are any plans to allocate allowances or funds to the council of owners as an honorarium from the strata funds, this should be formally proposed at the Annual General Meeting (AGM) with specific amounts and approved through a vote at the meeting. This means it should be put forward for discussion in advance and receive approval before any disbursement is made.

Jamie Horner
Empire Estate Agents
E: JHorner@empireestateagents.com
P: (08) 9262 0400

This post appears in the November 2023 edition of The WA Strata Magazine.

Question: Our Council has taken out a strata loan to cover the cost of the strata insurance renewal. Was the Council legally able to impose the burden of a strata loan upon owners?

In the month after our AGM, the new Council of the strata company, met and resolved to take out a strata loan to meet the cost of the strata insurance renewal that due imminently. The renewal was approximately $16K and the strata had no funds in the bank.

1. Given the timing, was the strata company required at the AGM to raise sufficient levies to cover the imminent expense, even if that meant a larger first levy?
2. Was the Council legally able to impose the burden of a strata loan upon owners? The loan is for the limit of our Council’s authority to spend outside AGM.

Answer: A Strata Company may borrow money required by it in the performance of its functions.

A Strata Company may borrow money required by it in the performance of its functions (Section 116). And further, a Strata Company may authorise a member of the Council of the Strata Company to execute documents.

Strata Company loans can be very helpful to adequately maintain common property – particularly for major capital works such as painting or elevator replacement.

We’d need to know what the proposed budget and levies were, what discussion was had at the Annual General Meeting, and what the subsequent accepted budget and levies were before commenting on whether the loan seems like a reasonable option.

The Strata Company should raise adequate funds to not only fund the annual budget but maintain a working capital of at least 25% of the annual budget (possibly more). If the Strata Company does not want to enter into a loan, then levies need to be adequately raised to build enough working capital for the payment of expenses.

Yes, there are a number of ways in which a Strata Company can improve their financial position, which may include raising levies, raising a one off special levy, or taking out a loan. The Council may indeed seek to take out a loan, but the bank may determine that the scheme poses a financial risk that’s way too high!

If the accepted levies are inadequate, then an Extraordinary General Meeting could have been called purely to increase the levies (overall or only for one of the levy instalments) to ensure there’s cash at bank to pay the insurance premium by the due date.

The annual insurance premium is usually the highest costing singular line item in any budget. The Council can anticipate an approximation of what the next premium will be and cater for this in the proposed budget and ensure enough working capital when it is due.

Further to your question, the Council are not technically expending existing funds in accordance with Section 102 of the Act (and Section 81 of the Regulations), as the loan is a borrowed asset and doesn’t ‘belong’ to the scheme.

In my opinion, it’s extremely poor financial management not to have adequate funds for the scheme’s day-to-day Administrative requirements.

A Strata Company must establish a fund for administrative expenses that is sufficient in the opinion of the strata company, for the control and management of the common property, for the payment of any premiums of insurance and the discharge of any other obligation of the strata company.

The question is, when is the insurance premium due and how are you going to pay for it?

Even if the Council succeeds in obtaining a loan, have they sought approval on what to do with it and how it is to be paid back?

The best practice is for the Council to be transparent, advise all owners about the financial state of the scheme, and act and minute accordingly.

ESM Strata
E: mchurstain@esmstrata.com.au
P: 08 9362 1166

This post appears in Strata News #628.

Question: Do funds that constitute emergency spending of up to $500 per lot come from the Admin or the Reserve fund?

We recently had to spend into our $500 per lot emergency allowance for an item that should normally be paid from the reserve fund.

Do funds that constitute emergency spending of up to $500 per lot have to come from the Admin fund or can they come from the Reserve fund?

The Act uses the term ‘Budget’, which I understand includes both funds, so can the payment come from either account?

Answer: The ACT is not clear, is almost silent on the matter.

This is a very good question as the ACT is not clear, is almost silent on the matter. What the act does provide in the way of restrictions is that expenditure not authorised under the approved budget is not permitted unless it is:

1. Expenditure of any amount fixed by the strata company by special resolution or without an amount being fixed, the amount fixed by the general regulations.
2. Expenditure (other than capital improvements) made on the following conditions being met:
   
   1. notice in the approved form of the purpose and amount of a proposed expenditure is given to the owners and first mortgagees of all lots in the strata titles scheme; and
   2. if the regulations so require, quotations or tenders for the expenditure are submitted to those owners and first mortgagees; and
   3. within 14 days after the requirements in the preceding subparagraphs are met, objection to the proposed expenditure has not been notified in writing to the strata company by the owners or first mortgagees of —
      
      1. 25% or more of the lots in the scheme; or
      2. lots of which the total unit entitlement is 25% or more of the sum of the unit entitlements of all the lots in the scheme;
3. expenditure required by a court or tribunal or by a notice or order given under a written law to the strata company.

It is important to note that objection under point c above by a mortgagee overrules that of the lot owner.

The amount of $500 that you reference is the amount prescribed by the regulations which I reference in point 1 above. The calculation here is $500 by the number of lots in the scheme for any one financial year regulation 80(1).

My opinion on the matter is that given the ACT does not specify, it is reasonable to assume that this applies to the Strata Company budget as a whole. Therefore it would be reasonable for the Strata Company to spend funds above the approved budget (reserve and administration in totality) up to the prescribed amount in any given financial year provided the expenditure also meets additional statutory obligations. I state additionally, as the ACT also provides that a Reserve Fund is established for the purposes of accumulating funds to meet contingent expenses other than those of a routine nature. It could be argued that exceeding budget on Reserve by the amount set by special resolution or prescribed amount would only be reasonable if the expenditure met a purpose in which the reserve fund was in place for.

Luke Downie
Realmark
E: ldownie@realmark.com.au
P: 08 9328 0999

This post appears in the October 2022 edition of The WA Strata Magazine.

Question: Is there a limit or threshold on Cumulative Budget Surplus in the Admin Fund?

Answer: There is nothing defined in the Strata Titles Act 1985 or it’s Regulations that sets a limit or threshold on any surplus for the Administrative Fund.

I’ve not actually come across the term “Cumulative Budget Surplus” before, but I can confirm that there is nothing defined in the Strata Titles Act 1985 or it’s Regulations that sets a limit or threshold on any surplus for the Administrative Fund.

Section 100 covers strata company Administrative Funds, and Section 102 covers the Budget that is required each financial year.

Andrew Chambers
Chambers Franklyn Strata Management
E: andrew@chambersfranklyn.com.au
P: 08 9200 4200

This post appears in Strata News #601.

Question: If the approved budget has a line item for building repairs and maintenance of $10,000, can the COO spend this amount on any building repairs without specifically seeking approval from the Strata Company?

If the approved budget has a line item for building repairs and maintenance of $10,000, can the Council of Owners spend the $10,000 on any building repairs that they agree are required? Does this decision need to be specifically approved by the Strata Company?

Also, does approval for spending within this budget need to be approved by all Council of Owner members or can the Treasurer approve any expenditure within the budget?

Answer: This is the target spend that the Council needs to try and stay within. The Council can then approve items to be repaired.

If the strata company approves a budget line item of $10k for repairs and maintenance, then this is the target spend that the Council needs to try and stay within. The Council, by simple majority, can then approve items to be repaired.

The Treasurer does not have authority, to approve repairs in isolation from the rest of the Councillors.

Scott Bellerby
B Strata
E: scott.bellerby@bstratawa.com.au
P: 08 9382 7700

This post appears in the August 2022 edition of The WA Strata Magazine.

Question: What is the process for authorising expenditure over budget. How should we deal with expenditure relating to emergency situations?

Answer: In emergency situations, common sense needs to prevail and a Council of Owners should proceed with caution while documenting the decision making process.

That’s a really good question. Essentially, when we talk about expenditure approval, obviously approving the budget at an annual general meeting is approving that expenditure. The Act provides for power of expenditure above the budget for the strata scheme, which is essentially $500 per lot that the Council of Owners can approve in any one financial year. Other than that, the only other ways of expenditure approval is through written notification, which outlines that process in detail and the requirements in order to seek approval in that manner. Other than that, it’s going to a general meeting.

Obviously, common sense needs to prevail and my suggestion when we talk about emergency situations is a Council of Owners should proceed with caution and that’s difficult to say because sometimes you’ve got to act quickly. My advice is that committees should assess the situation and if they feel they have an obligation to act quickly in an emergency situation (for example a life and death situation or a situation that is likely to cost the strata company significantly more, if they don’t act), I would strongly encourage them to act. But under careful consideration.

I also encourage Council of Owners members, if they found find themselves in that position, to document the process and the decision making well so that if they are questioned on it, they can easily demonstrate the decision making process they’ve gone through before they proceeded. Everyone’s interpretation of the emergency or situation is different, that’s why I think it needs to be a collective approach from the council and be in agreement in terms of how to proceed in those situations.

Luke Downie
Realmark
E: ldownie@realmark.com.au
P: 08 9328 0999

This post appears in the June 2022 edition of The WA Strata Magazine.

Question: Who has the final say over the Council of Owners budget and how monies are expended from an administration account?

Does the Strata company have the final say over the Council of Owners on how monies are expended from an administration account with a large surplus that is separate to the maintenance account?

Answer: The Strata Company controls what the budget is, and that’s what gets approved at the annual general meeting, and that’s what the council is required to try and adhere to.

Section 102 of the Act says that the strata company must have a budget for each financial year that must be approved at the annual general meeting of the strata company.

It’s important the budget takes into account the 10 year maintenance plan, and also any bylaws that may stipulate other schedules that may also need to be raised where you’ve got conflicting uses within the scheme.

So yes, the Strata Company approves the budget at the annual general meeting, and then the council of owners has limited capacity to expand outside of that budget. They can identify an expenditure item and go to the strata company and seek approval for additional expenditure.

Alternatively, they do have the ability to spend up to $500 per lot on unbudgeted items as well. So there is a little bit of scope for the Council of owners with regards to expenditure outside of the budget, but without knowing the size of the scheme and what might need to be expended, that spending capacity of the council is hard to determine.

Ultimately the Strata Company controls what the budget is, and that’s what gets approved at the annual general meeting, and that’s what the council is required to try and adhere to.

Scott Bellerby
B Strata
E: scott.bellerby@bstratawa.com.au
P: 08 9382 7700

This post appears in Strata News #511.

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