WA: Q&A The Reserve Fund and the Admin Fund

This article is about the reserve fund and admin fund.

Table of Contents:

• QUESTION: My lot requires repairs to common property. We have money in the sinking fund, but the strata manager says the expenditure needs a vote from all owners. Why do we have a sinking fund if it’s so difficult to access the funds for necessary repairs?
• QUESTION: A portion of our lot owners have exclusive use areas that include assets such as the sewerage systems and rainwater tanks. Does the reserve fund plan pay for the maintenance of the special-use land?
• QUESTION: I have been told no payment can be made directly from the reserve fund. Funds must be transferred and paid from the admin fund to facilitate payments under the strata Act. Is this correct?
• QUESTION: Can you transfer between Admin Fund and Reserve Fund and should you set up a chart of the account in the reserve fund?
• QUESTION: Do funds have to be transferred from Reserve Fund to Admin Fund for payments of maintenance? Or can the Reserve Fund operate independently?
• QUESTION: I’m questioning why they would introduce a 10 year maintenance plan and make a reserve fund compulsory. There’s no link between the two.

Question: My lot requires repairs to common property. We have money in the sinking fund, but the strata manager says the expenditure needs a vote from all owners. Why do we have a sinking fund if it’s so difficult to access the funds for necessary repairs?

Our strata manager has informed us that of the $7,000 we have allocated to general repairs, almost $6,000 has been used, leaving available funds of just over $1,000. My lot has roof leaks, ceiling damage and eaves damage that require repair by the strata company. Repairs will be $2,500.

We have around $24,000 in our sinking fund. The strata manager says a circular resolution must be issued to all owners to approve payment for the repairs from the sinking fund. Unless there is a majority vote, the repairs can’t be done. I find that unbelievable. Why do we have a sinking fund if it’s so difficult to access the funds for necessary repairs?

Answer: The strata company can allow for expenditure not approved within the budget as long as the amount of $500 per lot per financial year does not exceed the approved budget.

Under Section 102 of the Strata Titles Act 1985 as amended, the strata company must prepare a budget for each financial year and submit it for approval to its annual general meeting.

We assume that at the last Annual General Meeting of this strata scheme, a budget was approved, which includes an allowance of $7,000 for general repairs.

Section 102 (6) stipulates that a strata company must not make any expenditure that is not authorised by an approved budget except for expenditure as follows –

1. Expenditure of an amount not exceeding, in a financial year, for each lot in the strata titles scheme –
   
   1. The amount fixed by the strata company by special resolution; or
   2. If the strata company has not fixed the amount by special resolution, the amount fixed by the regulations;
2. Expenditure (not being of the kind referred to in subsection (5) – improvements/alteration to Common Property) made on the following conditions being met-
   
   1. Notice in the approved form for 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.

Regulation 81 of the Strata Titles (General) Regulations 2019 states that the amount fixed for the purposes of Section 102 (6)(a)(ii) is $500 (being $500 for each lot in the strata titles scheme).

Regulation 82 of the Strata Titles (General) Regulations 2019 states further in relation to expenditure that is subject to the objection procedure – for the purposes of Section 102 (6)(b)(ii), a notice under Section 102 (6)(b)(i) must include particulars of at least 2 separate quotations or tenders obtained by the strata company in relation to the proposed expenditure.

We are not privy to the size of the strata scheme, the strata plan or bylaws, or the total approved budget amount for this scheme. It is important to note that the strata company can allow for expenditure not approved within the budget as long as the amount of $500 per lot per financial year is not exceeding the approved budget. The strata company is silent on where the funds are coming from – the administrative fund or the reserve fund; while I personally always prefer to have any expenditure out of the reserve fund properly considered and approved at a General Meeting, if the strata company has to attend to necessary common property maintenance for which it has a duty under Section 91 of the Strata Titles Act and funds are available, then consideration should be given to that expenditure in line with the requirements under Section 102 (6).

Resultant water damage to eaves and ceiling may be covered under the building insurance subject to any applicable excess. The strata company may consult with their insurance agent in that regard.

Please note that this is not to be constituted legal advice; the owner may seek their own legal advice to address their personal circumstances.

Marietta Metzger
magixstrata
E: [email protected]
P: 08 6559 7498

This post appears in Strata News #676.

Question: A portion of our lot owners have exclusive use areas that include assets such as the sewerage systems and rainwater tanks. Does the reserve fund plan pay for the maintenance of the special-use land?

We are aware of the requirement for a 10 Year Plan. For our 15 lot strata, 12 lot owners are beneficiaries of an exclusive use by-law. The assets of the exclusive use area include the sewerage system, two rainwater tanks and water supply pumps, laundry room, overflow parking, driveway, lighting, security system and garden.

A 10-Year Plan (The Plan) has been adopted at the AGM. The Plan does not separate the two classes of common property and ignores Strata Titles Act Section 43 Exclusive Use By-Laws, with particular reference to Clause (3), that states:

Subject to the terms of Exclusive Use By-Laws, the obligations that would, apart from this subsection, fall on the strata company under section 91 (1)(c) in relation to the special common property, falls instead on the individual owners of the special lots.

There are two reserve funds. Does this mean the reserve fund for the strata company can be utilised to maintain the special-use land? Or will individual lot owners need to pay for the upkeep separately from levies and without access to the reserve fund?

Answer: Costs related to common property ‘exclusive use’ areas need to be grouped separately so only the 12 special lot’s owners contribute to their maintenance.

Costs related to the common property for that is the ‘exclusive use’ areas, need to be grouped separately so that only the 12 special lot’s owners contribute to their maintenance. All 15 owners, including special lot’s owners, will maintain the remainder of the common property. You don’t need two reserve fund forecasts, although this might be cleaner. You just need to ensure the costs related to these ‘exclusive use’ areas are apportioned solely to the special lot’s owners.

The existing reserve fund can be used for the special lot maintenance although it must be clear that the amount apportioned is contributed by the special lot owners. The non-special lot owners should not contribute to the maintenance of these areas.

Khaled Moukadem
Rawlinsons WA
E: [email protected]

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

Question: I have been told no payment can be made directly from the reserve fund. Funds must be transferred and paid from the admin fund to facilitate payments under the strata Act. Is this correct?

Answer: The Act does not specify that reserve fund expenses must be paid from either the reserve fund or the administrative fund.

The Strata Title Act 1985 does not specify that reserve fund expenses must be paid from either the reserve fund or the administrative fund.

Nor does the Act appear to expressly prohibit the movement of funds between a reserve fund and an administrative fund.

The legislation must work for both strata companies with mandatory reserve fund budgets and strata companies which do not operate a reserve fund. In this context, the absence of direct instruction about the fund from which to make repair and replacement payments is understandable.

This does not mean you can ‘repurpose’ money in the administrative or reserve funds with impunity. It simply means that a dispute about inappropriate use of administrative or reserve funds will be determined based on the facts of the dispute.

It’s important to remember that the separation between the administrative and reserve fund budgets and accounts is a theoretical accounting construct. While section 101 of the Act should require the strata company to maintain separate accounting records, the money from both funds is usually held in a single trust or bank account.

I suggest you ask for clarification to identify which section of the Act prevents direct payment of your maintenance expenses from the reserve fund account.

I do not believe the Act intentionally requires all payments to be made via the administrative fund. However, it is possible that the way your strata company’s funds are held or the payment authorisation provisions in your strata management contract may make payments via the administrative fund the most appropriate option.

Kaylene Arkcoll
Leary & Partners
E: [email protected]
P: 1800 808 991

This post appears in Strata News #639.

Question: Can you transfer between Admin Fund and Reserve Fund and should you set up a chart of the account in the reserve fund?

Answer: Neither the Act nor the Regulations appear to directly prevent the transfer of money between the administrative and reserve Funds.

Should I set up a chart of accounts for the reserve fund?

Section 101 of the Strata Title Act 1985 requires each strata company to prepare “proper accounting records of its income and expenditure”. This includes preparing annual statements of assets/liabilities and income/expenditure.

In my experience, complying with section 101 will require strata companies to maintain separate records of income, expenditure and balance for each fund.

For designated strata companies, the annual levy paid by each lot owner will comprise two separately calculated components (as per sections 100(1)(b) and 100(2)(b) of the Act).

• An administrative fund component – determined based on the forecast administrative budget expenses.
• A reserve fund component – determined with reference to the 10 year plan.

Critically, it is not possible to determine the appropriate annual reserve fund contribution without comparing the expenses in the 10 year plan with the money already raised toward those expenses. Knowing that fund balance requires you to track the reserve fund income and expenditure.

In other states which operate separate administrative and maintenance funds, financial statements normally show the income, expenditure and balance for each fund separately, and then provide a summary showing the total income, liabilities, cash held, etc.

Similarly, separate administrative fund and reserve fund levy amounts are approved at the AGM and listed on the levy notice, but lot owners make a single payment for the total amount due.

Can I transfer funds between the administrative and reserve fund?

Neither the Act nor the Regulations appear to directly prevent the transfer of money between the administrative and reserve Funds. However, court and tribunal precedent from other states suggests there may be limited circumstances in which a fund transfer is considered appropriate.

Both the administrative and reserve funds are collections of money that have been levied and paid for a specific purpose. That original purpose should not be lightly ignored.

For many strata companies the reserve fund levies will be based on a mandatory 10 year plan. Section 102(2)(a) requires you to take that 10 year plan into account when setting the annual budget. If there is a dispute, the State Administrative Tribunal may be reluctant to allow a major fund transfer unless you can demonstrate that the remaining fund balance is adequate to cover all of the expenses in the 10 year plan.

By comparison, there is unlikely to be an issue if the fund transfer is merely an accounting exercise and the funds are spent for their original purpose. For example, if a strata company has historically raised funds for maintenance work as part of their administrative levy, it will be appropriate to transfer that component of the administrative fund balance to the reserve fund from which the expenses must now be paid.

Kaylene Arkcoll
Leary & Partners
E: [email protected]
P: 1800 808 991

Question: Do funds have to be transferred from Reserve Fund to Admin Fund for payments of maintenance? Or can the Reserve Fund operate independently?

Answer: Technically speaking there is no requirement for this in the act, therefore yes, reserve funds can operate completely independently. It comes down to the strata company and or strata manager’s opinion on best practice.

Jordan Dinga
Abode Strata
E: [email protected]
P: 08 9368 2221

This post appears in Strata News #531.

Question: I’m questioning why they would introduce a 10 year maintenance plan and make a reserve fund compulsory. There’s no link between the two.

I’m questioning why they would introduce a 10 year maintenance plan and make a reserve fund compulsory. There’s no link between the two. The new changes do not give any benchmark for how much a strata company should raise as a reserve fund.

Also, when does the 10 year plan have to be in place and do the funds need to be saved into a separate fund?

Answer: I don’t think you’re going to be able to have one without the other.

I have exactly the same question. I’m not too sure why. Yes, I don’t believe that the new regulations actually stipulate how much you need to keep in there as a minimum. This will be something where, if someone asks to see the records and they see that your reserve fund forecast is showing that you need to spend $250,000 to update your lifts and you’ve got no money, people will be asking questions such as ‘Where are they going to get the money from? Is that going to mean a special collection that they’re going to have to do?’ So that will be a concern.

I don’t think you’re going to be able to have one without the other. It might all take a year or two before it washes through the system. I feel that the people who are purchasing are going to be the ones who are going to be driving this. If you’re looking at two strata schemes next door to each other and they look similar, but one seems to be better managed than the other, then that’s probably what’s going to drive it at the end of the day.

Regarding whether there needs to be a separate account, yes, I believe that there has to be a fund so a fund needs to be created ie. bank account or trust. As I said, my understanding is the regulations don’t stipulate how much money you need to keep in there but I guess in terms of the council of owners, they need to understand how they’re going to be able to get that money or get a loan or look at whatever options there might be to have that money available to them when they require it.

I’ve had people say to me, ‘why should I pay for a fund for a lift to be upgraded in 10 years time if I may not be there?’ but that same person is using the lift every day. So it sort of seems a bit silly, but these are the questions that I’m asked.

So yes, I believe the regulations don’t stipulate and aren’t clear on that. But I think something will happen to someone, and that’ll create precedence in the industry and then people will follow. So no doubt, lawyers will get involved and then everything will get messy after that.

David Chokolich
HFM Asset Management
P: 1300 021 420
E: [email protected]

This post appears in Strata News #416.

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