Trafalgar News

Trafalgar News

Understanding Sectional Title levies: How they are calculated and why they increase.

Levies are the lifeblood of Sectional Title (ST) schemes and yet there is still widespread confusion about how they are calculated and what they are used for. It is time for trustees, property managers and owners to work together to achieve more clarity and fewer levy misunderstandings and disputes, says Andrew Schaefer, MD of leading property management company Trafalgar.

ST schemes need levy income, firstly, to cover the operating and administrative costs of the sectional title scheme. These costs include maintenance of common areas and gardens, security services, insurance, water and electricity for communal spaces, salaries for any staff employed by the scheme and management expenses such as bank charges and accounting and audit fees.

“It is levy income that ensures the collective and sustainable upkeep of the scheme, with all owners sharing the responsibility for maintaining a well-managed and functional property and preserving the value of the homes in the scheme in the process.

“Secondly, all ST schemes are obliged to make an annual contribution to the Community Schemes Ombud Service to pay for the CSOS services of dispute resolution and conduct rule approval, and to establish and maintain reserve funds to cover the major repairs and capital improvements that are anticipated in terms of a 10-year Maintenance Plan, such as the repainting of buildings, roof repairs or waterproofing, carport installations and lately, solar power systems.”

However, he says, efficient collection of levies is not enough. Transparency in the use of that revenue is also essential for the well-being of the scheme. ST trustees should ensure that owners are always kept informed about how their levies are being utilised and that they can easily access the levy payment and other financial records of the scheme.

In addition, individual levy statements should ideally contain a breakdown of how each owner’s levy is made up, including:

*The administrative fund levy payable;

*The CSOS contribution payable:

*The reserve fund levy payable;

*Any additional levy payable for an Exclusive Use Area;

*Any utility costs payable if these are not individually metered; and

*Any rental payable if the owner is renting space such as a parking bay from the Body Corporate.

Schaefer says owners should also be empowered to understand how the scheme’s levy income requirements are calculated and how their contributions are determined, as this helps to foster a collaborative approach to ensuring that the scheme remains financially secure.

“The process starts with the preparation by the trustees, usually with the help of the managing agent, of the scheme’s updated annual budget, taking into account all the routine operating or administrative costs as well as the necessary contributions to the CSOS and the scheme’s reserve fund, and the income that will be needed to cover these expenses. Effectively the budget will represent the breakdown and application of levy expenses and show all owners how their levies will be spent over the financial year concerned.

“The budget must of course make provision for any expected increases in all of the scheme’s regular expenses and should also contain some leeway for unexpected costs in the next 12 months. It is a real mistake for trustees to underestimate costs to try to suppress levy increases, as this could result in the depletion of the scheme’s reserves or even necessitate the introduction of a special levy, causing much discontent among owners. Under no circumstances should a deficit budget be presented.”

The next step is for the budget to be presented, debated and approved, with or without amendments, at the next AGM of the scheme’s body corporate, after which it will become the basis on which the trustees can calculate the individual owners’ levies for the following year, he says.

“These calculations are typically based on the participation quota (PQ) assigned to each unit, which is its floor area as a percentage of the total floor area of all units in the scheme, as specified on the sectional plan. The PQ also reflects each owner’s share in the common property and is a good way to determine the portion of the total levy income that each owner needs to contribute. (Very occasionally nominated values are in place and approved as a different allocation of levies compared to the more prevalent PQ-based method.)

“Essentially, owners with higher PQs will pay higher levies, and contribute more towards the maintenance and management of the common property, as a fair reflection of their greater ownership interest in that property.”

Once the division of costs has been calculated, says Schaefer, the trustees need to complete the process by writing to each owner within 14 days of the AGM concerning the annual levy increase linked to the approved budget and, in the interests of transparency, provide them with a levy schedule that shows their unit size and PQ, so that they can check that their new levy amounts are correct.

Issued by the Trafalgar Property Group

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