Commissioners Corner – Financial Management Part 2

Commissioners Corner – Financial Management Part 2

Let’s talk about money.

Part 2

In Part One of this series, I talked about body corporate finances and, in particular, the responsibilities of lot owners to pay their levies.

Equally, the body corporate and its committee has responsibilities for how they spend body corporate funds and in this part, I’ll look into those responsibilities in a bit more depth.

While the Act and the Regulation Modules go into considerable detail about spending obligations, the critical aspects for the body corporate and its committee as far as I am concerned are to spend body corporate funds only:

• on things budgeted for and only on body corporate matters; and
• within their spending limits; and
• by making decisions which are reasonable.

Levies are struck in concurrence with budgets set and agreed to at an annual general meeting so it follows that those levies are to be spent only those items which are budgeted for. This also underscores the imperative for a body corporate to ensure it has qualified advice when setting budgets – otherwise, how else is it to know with any degree of certainty what money it might require for different purposes?

It may sound obvious but body corporate funds should only be spent on body corporate matters. One illustration of this is that the body corporate should be spending its funds only on those things which are a body corporate responsibility and not, for example, on an improvement or a maintenance job which is the lot owner’s responsibility.

Perhaps a less obvious illustration is in relation to things such as Christmas or other social events, or payments to committee members. On the former, adjudicators in my office have made orders in which the use of body corporate funds for a Christmas event should not have occurred. It may make my office appear akin to the Grinch, but the fact remains that this is not the purpose for which levies were struck and collected. There is, of course, nothing stopping owners or committees from contributing to social events or gifts of gratitude from their own pockets.

On the latter issue, there is provision under the relevant Regulation Module for committee members to be paid for their work. That said, there are limits to this and it needs to be considered and then approved at a general meeting. There is no legislative provision for committee members to be paid outside of this so while things such as honorariums or similar are noble gestures, bodies corporate and their committees should take care to ensure they are properly meeting committee expenses.

I think it is also important for bodies corporate and their committees to remember that if they have budgeted for certain things to be spent in that financial year and collected levies to cover those things, then the levies should be spent. In other words, if $10,000 was budgeted for some maintenance work, then $10,000 should be spent on that maintenance work. It does not mean that $10,000 should be budgeted for but only $5,000 spent and the rest tucked away for a rainy day. Nor does it mean that $10,000 should be budgeted for then the maintenance work gets deferred indefinitely. It also does not mean that if there does happen to be surplus funds, those funds can be refunded back to owners – there is no provision in the legislation for this to occur. All body corporate funds are there for a specific purpose and are meant to be spent on properly approved, specific items and not spent on a whim.

I should clarify here that all of the above is quite separate to the notion that a body corporate can and should be planning for its anticipated expenditure. Proper forecasting of sinking fund needs up to a decade into the future is essential for the body corporate to be able to plan and budget for its future maintenance works.

This discussion leads us also to spending limits. Legislation prescribes spending limits as a way to ensure there are proper controls on and oversight of the spending of body corporate funds. Given that my office regularly sees dispute resolution applications lodged in which it is alleged that bodies corporate have exceeded their limits, it is apparent that these limits are not universally understood. Here is a handy summary:

Bodies corporate, especially the committee, should be aware that they cannot spend money on projects in stages to avoid any of the spending limits outlined above. The full cost of any project needs to be factored in when looking at the relevant spending limits.

Finally, there is the responsibility of the body corporate to act reasonably in its decision-making. In the case of finances, one issue on which the body corporate might be called upon to make a decision is in relation to waiving some part of a body corporate debt.

Section 145 of the Standard Module provides that if satisfied there are special reasons for waiving a penalty or liability for recovery costs, the body corporate may waive the penalty or costs in whole or part. The body corporate cannot exercise this discretion simply because it has been asked to do so. It has to be satisfied there are “special reasons” for a waiver.

“Special reasons” are not defined, although previous adjudicators’ orders have found that “special reasons” might include bank or computer error. While the onus would be on the owner to demonstrate their particular circumstances constitute special reasons, bodies corporate should also be mindful that this discretion exists. A blanket “no waive” or “no reinstatement” policy might be considered unreasonable, as it does not take into account the specific circumstances of each case. It might also be reasonable for the body corporate to ask for supporting evidence of a claim of special reasons. An example of supporting evidence might be a bank statement or other communication from the financial institution to support the owner’s claim of error.

Another area in which the body corporate needs to consider its reasonable decision-making is in relation to its debt recovery. Bodies corporate have a legislated responsibility to pursue outstanding debts from owners. So it follows that in pursuing debt recovery, the body corporate should do so reasonably and equally: if, for example, three owners are in deficit, the body corporate should be pursuing action against all three owners, and not just one. Also, if the body corporate decides to exercise its discretion to waive some charges under special reasons for one owner, it needs to be mindful of potentially being asked to do so by a different owner, particularly if similar circumstances are at play.

For further information please contact the Information and Community Engagement Unit of my office on 1800 060 119 or visit our website www.qld.gov.au/bodycorporate.

This article was contributed by Chris Irons, Commissioner for Body Corporate and Community Management.