Financial management of owners corporations
Tax, interest and fees
An owners corporation is considered by the Australian Tax Office to be a company and so must pay tax at the current company rate on all income exceeding $1. Income is money received (e.g. bank interest or rent from leasing common property) but not fees paid by members, which are regarded as mutual funds.
The ability to charge interest on outstanding fees is capped at the maximum rate of interest payable under the Penalty Interest Rates Act 1983 (Vic) (s 29). It is necessary to pass a resolution to apply penalty interest and the decision to charge interest must be authorised at a general meeting. A committee has discretion to waive or to reduce penalty interest. Such a decision must be explained by the owners corporation at an annual general meeting.
The notice of any fees and charges due and payable by the lot owner must allow at least 28 days for payment and must state the applicable interest rate and details of the dispute resolution process under the rules in respect of disputed fees and charges (s 31). A final notice must be provided thereafter as a prelude to legal action (s 32).
Professionals (e.g. estate agents) can hold member’s funds in their statutory trust accounts. A separate bank account may be opened for each owners corporation or held in a manager’s pooled or trust account (s 27). An owners corporation that has an approved maintenance plan (see ‘Maintenance plans and funds’, below) must keep separate accounts for its maintenance fund (s 33(2)). This does not require a separate bank account.
Borrowing money in excess of the current annual fees of the owners corporation requires a special resolution (s 25 (1)(b)).
Reclassification of owners corporations
From 1 December 2021, owners corporations have been classified into five tiers:
- tier 1: more than 100 occupiable lots;
- tier 2: 51 to 100 occupiable lots;
- tier 3: 10 to 50 occupiable lots;
- tier 4: three to nine occupiable lots; and
- tier 5: a two-lot or a ‘services only’ owners corporation, which has no occupiable lots but contains services on common property (e.g. shared water, gas and sewerage pipes, pumps, drains, electrical and telecommunications infrastructure, and common property assets such as fences, pools, and water tanks).
A car park bay or storage cage is not an occupiable lot notwithstanding that it may have a separate title.
A tier 1 owners corporation must have its financial statements audited, whereas a tier 2 owners corporation’s accounts must be reviewed by an independent authorised accountant. Neither an audit or review is required for a tier 3, 4 or 5 owners corporation; it is optional.
Maintenance plans and funds
Only tier 1 and tier 2 owners corporations must prepare a maintenance plan for common property. Such plans may be amended by ordinary resolution. Any levies that are struck must be adequate to fund the plan.
A maintenance plan is discretionary for tier 3, 4 and 5 owners corporations (s 36(2) OC Act). Once approved, an owners corporation must establish a maintenance fund and pay into that fund any part of the annual fees levied for the purposes of the maintenance plan (s 42).
An approved maintenance fund (ss 40, 41) is equivalent to what is commonly known as a ‘sinking fund’ or ‘reserve fund’. Subject to any prior conditions, money may be paid out of the maintenance fund at any time in accordance with the approved maintenance plan (s 43). Money may also be paid out of the maintenance fund if the owners corporation, by special resolution, approves the payment (s 44) or without a resolution of members for urgent matters described in section 45(2).
A maintenance plan is approved by ordinary resolution of the owners corporation (s 38(1)) at a general meeting, or by the committee. Implementation of the plan must be reported to the lot owners as soon as possible.
Fees designated for the purpose of an approved maintenance plan must be paid into a maintenance fund in the name of the owners corporation, and the amount must be adequate to fund the plan (s 42). The plan must be provided at the first meeting of the owners corporation (s 67(d)).