Levies and Capital Works Funds
Living or investing in a strata scheme imposes some additional financial obligations on lot owners than other forms of property in New South Wales.
If you’re considering buying into a strata scheme or want to learn more about how levies impact you, we outline everything you need to know.
Let’s start with the basics – what is a levy?
NSW Fair Trading defines levies as “a fee or ‘contribution’ paid by all lot owners in a scheme to cover any projected costs and expenses. All levies must be worked out in proportion to the unit entitlements of each lot.”
Levies are calculated at an annual general meeting (AGM) of the owners’ corporation and must be approved by majority vote.
They are calculated based on a budget, tabled before voting, which outlines the current financial situation of the strata scheme and estimates of any future payments to be made or received.
Types of Levies
There are two types of levies, including:
- Capital fund levies
- Special levies
Both levies are calculated based on the unit entitlements of each lot owner.
Capital Works Fund
Capital fund levies are collected for the capital works fund of the strata scheme, previously known as a sinking fund, which enables an owners’ corporation to pay for repairs and maintenance.
A capital works fund is used for capital expenditure and non-recurrent items, such as:
- Repair works to common property
- Painting or repainting common property
- Renewing or replacing common property fittings, such as lobby carpet
- Renewing or replacing personal property for the strata scheme, such as pool furniture
An owners’ corporation can vote to introduce a special levy when there are insufficient funds available to cover large or unforeseen capital works. This is called a special levy.
In addition to a capital works fund, owners’ corporations are also required to raise an administrative fund, which is used to pay for recurrent expenses that are part of the day-to-day management of the strata scheme. These include:
- Common property maintenance, including cleaning, gardening and lawn mowing services.
- Monthly or quarterly expenses, such as insurance, electricity and water.
- Administrative expenses, including secretarial fees and postage.
The 10 Year Capital Works Fund Plan
By law, all strata schemes in NSW must have a 10 year capital works fund plan in place which commences from the first AGM and must be reviewed at least every five years.
The purpose of a 10 year capital works fund plan is to ensure sufficient financial reserves are built up to avoid lot owners having to pay large, one-off levies that may cause financial strain.
Managing Levy Obligations
It is recommended that anyone considering buying into a strata scheme conducts their own research into the administrative and capital works funds of the scheme first.
This information is available from the section 184 certificate and can also be found through other searches conducted by a lawyer or conveyancer.
Next, we outline some important financial considerations for lot owners when managing their levy obligations.
Payment Frequency of Levies
The timing of when levies are due can vary from scheme to scheme. An owners’ corporation may require that levies are paid by lot owners on a yearly, half-yearly, quarterly or monthly basis.
Interest on Unpaid Levies
Typically, interest on unpaid levies is charged at 10% simple interest per year. However, an owners’ corporation may make a special resolution to charge no interest on unpaid levies.
Discounts on Levies
To incentivise early payment of levies by lot owners, an owners’ corporation may make a special resolution to provide a 10% discount on payments made before the due date.
Reimbursement of Levies
If an owners’ corporation determines that money collected for the capital works fund is not needed, they may decide by unanimous resolution to distribute the money to lot owners.
Payment Plans for Unpaid Levies
Finally, an owners’ corporation may enter into payment plans with a non-paying lot owner. In the event that levies remain outstanding, the owners’ corporation may take recovery action through their Local Court.
For more information about levies, click here.