15 Jun Body corporate reserve funds: What you need to know

Making provision for reserve funds in the annual budget of a body corporate has always been a bit of a guessing game for trustees. Some trustees preferred to keep the levies as low as possible and to rather raise a special levy when the need arises as opposed to maintaining higher levies that secured a sufficient reserve fund over time which eliminated the need to raise a special levy.

Things were about to change

On 7 October 2016, the new Sectional Titles Schemes Management Act of 2011 came into force, changing things drastically. As a result of this legislation, bodies corporate are now compelled to make provision for reserve funds on an ongoing basis.

In terms of the new Act, bodies corporate have to make provision for long term maintenance requirements of the scheme. A 10-year maintenance plan is required and must project all capital expenditure required over the next 10 years. Thereafter, the plan must be reviewed annually to ascertain what maintenance was performed during the past year and what maintenance will be required for the following 10 years.

Two budgets are now required

The administrative (original) budget is still required to make provision for the day-to-day maintenance activities.

The reserve budget is the second, additional budget that is now required in terms of the new Act to make provision for a 10-year maintenance plan. Furthermore, provision must then be made in the administrative budget for levies to be collected from the members in the scheme to fund the 10-year maintenance plan (reserve budget).

A further requirement of the new Act is to calculate the reserve amount required for the administrative budget. This calculation is determined by way of three methods:

• If the body corporate reserve fund at the end of the financial year is less than 25% of the levy income generated during that year, the body corporate must provide for a reserve amount equal to 15% of the levy income for the new financial year.
• If the body corporate reserve fund at the end of the financial year is equal to or more than the levy income generated during that year, the body corporate is not obliged to make provision for a reserve amount in the new budget.
• If the body corporate reserve fund at the end of the financial year is more than 25% but less than 100% of the levy income in that year, the body corporate must make provision for a reserve amount equal to the repairs and maintenance items provided for in the new budget.

In the past, many bodies corporate didn’t make sufficient provision – or any provision at all – in a reserve fund for major, planned maintenance needs. The underlying purpose of the new Act is to force community schemes to save on an ongoing basis so the financial impact on owners is not as devastating as it is when special levies are suddenly raised to pay for major expenses.