How are your levies calculated?
As an Owner in a Community Scheme it is your right to know how the Body Corporate or Home Owners’ Association funds are being spent, how your levy is calculated and how your investment is being maintained.
Community Scheme levies are paid by each Owner as their contribution towards the expenses of the scheme. Calculating levies can be a bit tricky, but it is important that Owners understand what is included in the levy and how the final amount is reached.
A Sectional Title Scheme or Home Owners Association levy is typically made up of the contributions required for the Administration Fund, Maintenance Reserve Fund and the Community Schemes Ombud Service Levy (CSOS Levy).
The Trustees or Directors may approve the draft Administration Budget and Maintenance Reserve Fund Budget in order for it to be implemented at the start of the new financial year, but it has to be ratified by the Owners at the Annual General Meeting.
Very important, the maximum levy increase that the Trustees or Directors may approve annually is 10%. If a higher increase is required, it will need to be approved at the Annual General Meeting and backdated to the start of the financial year to ensure that the income is as per the approved budgets. By not backdating the increase it could lead to a shortage in cashflow for that financial year.
Your Managing Agent can assist you in drawing up the various budgets, in order for the Community Scheme to accurately forecast the cashflow required for their short-term and long-term projected expenses. Your Managing Agent can also assist the Trustees or Directors in managing the long term and short-term expenses.
Administration Fund Levy
The Administration Fund is used for Operational Expenses such as management fees, insurance premiums, salaries and maintenance. Basically, the day to day running expenses of the scheme.
Maintenance would include normal routine maintenance and unplanned maintenance, like electric fence maintenance, garden service, replacing bulbs, lift maintenance, repairing a burst pipe and other related tasks.
Other Administration Fund expenses typically include municipal charges (water, electricity etc.) security services, bank fees, annual auditing fees, accounting fees, and the 3-yearly insurance valuation,
Maintenance Reserve Fund Levy – 10 Year Maintenance Plan
The Maintenance Reserve Fund is used to cover expenditure for the long-term maintenance, repair and replacement of capital assets, such as roofing, painting, driveways, gates and other common property structures. Also known as Planned or Preventative Maintenance, the goal is to prevent deterioration and extend the life of these capital assets and avoid sudden and unforeseen expenses which could lead to sudden and unforeseen special levies.
The 10-year Maintenance Plan is used to calculate year on year what funds will be required for the completion of each project at a specified time.
In theory, the Reserve Fund Levy amount for the current financial year is determined as follows:
Reserve fund levy = [cost of planned maintenance activities] – [the reserve fund opening balance + interest earned on the reserve fund account]
Community Scheme Ombud Service Levy (CSOS)
The CSOS Levy is calculated at 2% of each Owner’s monthly Administration Levy, less the first R500.00. If your Administration Levy is less than R500.00 you do not pay the CSOS Levy. The maximum CSOS levy an Owner may pay is R40.00
This levy is paid to CSOS every quarter.
Overview
When planning the levy for the following financial year, one should take a long-term view and ensure that it is sustainable from an inflation perspective but also sufficient for planned maintenance activities. The goal should be to plan ahead to avoid erratic levy fluctuations, special levies and loans.
At the same time, the Annual Reserve Fund contribution must meet the minimum amount prescribed by the Sectional Titles Scheme Management Regulations, which is 25% of the Administration Levy. But it must meet the long-term maintenance, repair and replacement expenses.
For optimal long-term financial management, trustees should draw up a cash flow projection that is based on the 10-year maintenance plan – this will indicate how much money will be available at the end of each financial year.
With a regularly updated long-term cash flow forecast in hand, the need for special levies or bridging loans can be eliminated.
Calculations
These three levies are calculated for each owner as follows using the participation quota of their section:
How can LevyTate help your Scheme?
LevyTate Managing Agents will assist you with the management of all your community schemes’ financial, legislative and administrative requirements. For more information send us an email on info@levytate.co.za.
