DEATH, TAX… AND BODY CORPORATE LEVIES

There are three certainties in life: death, tax — and, if you own a lot in a Queensland community titles scheme, body corporate levies.

For many Queensland lot owners, however, the third certainty is arriving at an increasingly difficult time.

Australian households have spent the last several years absorbing higher mortgage repayments, rising insurance premiums, increased utility and food costs and the general erosion of purchasing power associated with persistent inflation. Interest rates remain materially higher than the extraordinary lows experienced during the pandemic, placing continuing pressure on household cash flow.

The Federal Government’s recent changes to their taxation policy adds another dimension. Media and other tracking companies report that the recent Budget has effectively removed investors from the property market and, similarly, the reports are of reductions in housing values Australia wide.

In short, it costs more to live and household wealth is declining.  Those inverse yet converging lines are a reality that needs to be met, head on.

That brings us neatly to body corporate levies.

A body corporate operates, in financial terms, much like a household. Its expenditure does not stop because its income is under pressure.  Insurance premiums must be paid. Common property must be maintained. Lift contracts, gardening, cleaning, electricity, fire compliance, plumbing and other essential services continue regardless of whether individual lot owners are experiencing financial difficulty and whether those difficulties knock on to bodies corporate.

Bodies corporate have a single source of funding – contributions paid by lot owners. 

Levies Are the Lifeblood of the Body Corporate

This is the starting point.  If you have any experience in recoveries outstanding levies, you will have heard this expression.   

One of Queensland’s most respected and now retired District Court judges, made these remarks in 2012 and they have held true to today.  They are important and worth repeating:

“Contributions [i.e. levies] are the lifeblood of a body corporate in much the same way as taxes are the lifeblood of the state.  Just as legislatures have imposed special regimes restricting the capacity of taxpayers to delay their liability to pay tax by arguing about it, and otherwise limiting such disputes, it may be unsurprising if the legislature were to impose a regime which would provide particularly favourable treatment for recovering body corporate contributions, including legal costs incurred in the process.”

The description of levies as the “lifeblood” of a body corporate is therefore more than rhetoric. Without levies, the body corporate cannot discharge its statutory functions.

The economic consequence is equally important. If one owner does not pay, the body corporate remains liable to its contractors, insurers and other creditors. Unless the shortfall can be recovered, it ultimately affects the financial position of the scheme as a whole.

How Are Levies Imposed?

The statutory framework begins with the Body Corporate and Community Management Act 1997 (Qld) and the applicable regulation module which requires the body corporate to prepare and adopt annual budgets for its administrative and sinking funds.  The administrative fund is concerned principally with the recurrent expenditure to administer and maintain the scheme; whereas, the sinking fund is directed towards capital expenditure and anticipated major works over the longer term.

The body corporate must pass resolutions fixing the levies payable by owners. These decisions are ordinarily made at the annual general meeting. The budget and contribution decisions are not merely accounting exercises. They are statutory decisions which determine the financial resources available to the body corporate to perform its functions. A committee should resist the temptation to regard a low levy as inherently good financial management. If the expenditure required to operate the scheme is $500,000 but the owners are asked to contribute only $400,000, the body corporate has not saved $100,000. It has created a $100,000 problem.

That problem may eventually appear as deferred maintenance, depletion of reserves or a special contribution.  Good governance requires a realistic relationship between anticipated expenditure and contributions.

In today’s environment this is even more important.  In fact, I would say that good budgeting is critical and should bring to account the likelihood of owner defaulting and the costs associated with recovering outstanding levies.  Provisioning is key.

The Statutory Machinery for Recovering Arrears

The legislation is clear about what happens when an owner does not pay.

If a contribution or instalment (levy) is not paid by the due date, the body corporate may recover as a debt:

1. the unpaid contribution or instalment (levy);
2. any applicable penalty – penalty is simple interest up to 2.5% per month on the outstanding levy.  So, it has quite a sting in its (penalty) tail!; and
3. costs reasonably incurred by the body corporate in recovering the amount.

There is an important and often misunderstood point here. The body corporate does not operate under a costs immunity and is not automatically entitled to recover every dollar spent on levy collection. Recovery costs must be reasonably incurred.  That said, another judge has said:

“It is clearly vital in modern social conditions to have rather draconian measures in place to ensure prompt payment of body corporate levies for the efficient operation of body corporates and indeed, the peace of mind of lot owners in them whose lives will be a misery if they cannot rely on their fellow owners to get the body corporate in funds to enable it to attend to its responsibilities.”

More recently, the Queensland Court of Appeal has weighed in.  The regime under the Queensland legislation is to be treated as consumer protection legislation, designed to protect those who pay, from those who don’t:

“The severe financial hardship for the body corporate caused by arrears in contributions was intended to be addressed by the amendment. The body corporate depends on each lot owner making its payment of the contributions reflecting the proportionate share of the body corporate’s projected expenditures, so that the body corporate meets those expenditures. Ultimately, it is the other lot owners who are meeting their share of the expenditures who will be disadvantaged by the non-payment by one lot owner of that lot owner’s contributions.”

These judicial comments illustrate the strength of the statutory regime. The legislation is designed to prevent the financial burden of an owner’s default from simply being transferred to the remaining owners.

There Is a Sting in the Tail: The 2.5% Penalty

By ordinary resolution, a body corporate can fix a penalty where a contribution or instalment is not received by the due date.  The penalty must be simple interest of not more than 2.5% for each month – you do the maths, that is 30% per year!  Quite a deterrent.

If your scheme has not passed the necessary resolution, I suggest you speak to your body corporate manager and add it to the agenda at the next meeting.  Bodies corporate should not be treated by defaulting lot owners as cheap finance.  There should be a strong incentive to pay. 

I think that the first cheque cut every quarter should be to the body corporate.  Having a penalty resolution in place sharpens owners’ attention to paying their levies on time.

The Two-Year Two-Month Rule Matters

There is another provision committees should have firmly in their financial calendar.

Where a contribution or instalment has remained outstanding for two years, the body corporate must commence proceedings to recover the amount within two months.

This is important because levy recovery is not something which should be left indefinitely in the “to be dealt with later” category.

An effective arrears policy should identify debts early, escalate them progressively and ensure that the statutory deadlines are not overlooked. 

Better Fiscal Management — Before Legal Gets Involved

The best debt recovery strategy is prevention.  Committees should work closely with their body corporate manager to ensure:

First, budgets are based upon actual expenditure, known contractual increases, insurance costs and realistic maintenance forecasts. 

Second, sinking fund contributions reflect the long-term capital requirements of the scheme.

Third, levy arrears are monitored continuously rather than discovered at the end of the financial year.

Fourth, the body corporate adopts a clear and consistently applied arrears policy. Owners should know when reminders are issued, when penalties apply and when the matter will be referred to solicitors.

Fifth, hardship arrangements are considered individually and lawfully. Compassion and consistency are not mutually exclusive.

Finally, the body corporate should involve its solicitor at an early stage where an account remains unpaid. Early legal intervention can often be considerably cheaper than allowing an arrear to compound over several years.

Your body corporate manager can manage the financial and administrative processes, including managing the recover policy. The committee’s role is to ensure that the policy is properly authorised, consistently applied and directed towards protecting the interests of the body corporate as a whole.

Death may be certain. Tax may be unavoidable. But, with good financial management, a body corporate may avoid adding unpaid levies, the high costs of debt recovery and the financial stress which follows to the list of certainties.

Article Contributed by Troy Hawthorn, Partner at Stratify Legal.