Should you opt-out of having a Long-Term Maintenance Fund?
That's easy. Yes. You should.
It could even be regarded as poor governance if you don’t opt-out because having a Long-Term Maintenance Fund will probably mean that the body corporate will collect more levies from owners than it needs.
Notice that Long-Term Maintenance Fund is capitalised. That’s because it’s a thing. A “Long-Term Maintenance Fund” is defined in the Act and because it’s defined, it comes with rules.
Money in a Long-Term Maintenance Fund can only be used on items in the LTMP.
If a job planned in the LTMP is going to cost more than 10% over budget, you need to call an EGM and have the body corporate approve the increased expenditure before you can go ahead with the job.
The first bullet point above places a restriction on how you use your own cash and the second creates a requirement that's just a plain waste of everybody's time.
Different jars on the mantlepiece
If you have a Long-Term Maintenance Fund (Fund), it’s like having different jars on your mantlepiece to hold the money for electricity and groceries. If you run out of money in the food jar, you can’t use the money in the electricity jar and have to go hungry. That would be dumb. So is having a Long-Term Maintenance Fund.
But I must quickly add that it would be even dumber if you didn’t save up to pay for future maintenance.
Opting out doesn't mean you are foolish
That’s the point that so many people misunderstand. Just because a body corporate has opted out of having a Long-Term Maintenance Fund, it doesn’t mean they are irresponsible. It doesn’t mean that they are not going to build up cash reserves to pay for future maintenance. It just means that they are going to give their cash reserves a different name - like “Maintenance Reserve” - and make up their own rules regarding the use of their own spare cash.
And fair enough. After all it is their property- and their money - and they are grown up.
If you’re still not convinced here are some more things to consider
If you have a Fund, as defined in the legislation, you really need to update your LTMP every year (unless you like having lots of EGM's of course). This is because you need to be sure that your LTMP is always up to date otherwise that 10% rule kicks in. It actually makes sense to update your LTMP every year anyway and if you have a good system, it isn’t that hard. On the other hand, if you’re paying a contractor to prepare your plan every three years...well it probably won’t happen.
Another reason to update your plan every year is to allow the opening balance in the Fund, as recorded in the LTMP, to match your Financial Statements. Because if you only update your plan every three years, on two of those years, the opening balance of the Fund recorded in the LTMP will almost certainly be incorrect. Then anyone looking at the LTMP and the Financial Statements will see two different values and wonder what’s going on. It makes far more sense to close off the annual accounts, establish the opening balance of the Fund for the new financial year, update that value in the LTMP, then it's off to the AGM to have them both approved. It goes without saying that the start date in the plan should always be the first day of body corporate’s financial year.
If you have a Fund, you should also open a separate asset account in your balance sheet and maybe even a separate bank account for the Fund. It isn’t entirely necessary to have separate bank accounts because any good accountant will be able to keep track of everything regardless. But having a separate asset account and bank account would make the audit trail a lot more transparent and either way, if you have a Fund, you’re up for extra bookkeeping.
If you have a Fund, there would be temptation to over estimate jobs - the 10% rule again. This could lead to the body corporate holding even more of each owner’s money than it needs. Owners hate that and fair enough.
If you opt-out of having a Fund you can elect to use some of your reserves to pay a hefty bill - planned or unplanned - when you don't have enough in the operating account. This would include things like the insurance or a maintenance job that nobody thought of. All that would happen is the reserve would fluctuate a bit but in the case of your insurance premium, it will build up again quickly so that everything is back to square on the last day of the financial year. The idea is that you would be using the body corporate’s own reserves to balance out cash flow rather than creating a special levy to pay any one-off operating expense. This shouldn't even need explaining because it's common practice in every business and household. Because it's practical, logical and completely normal.
At the end of the day, long-term maintenance planning and funding is as much to do with cash flow management as it is with maintenance. Good planning avoids having too much owner's money in the body corporate’s bank account - or having the body corporate run out and having to raise special levies.
A good LTMP will help you with this regardless of whether or not you opt-out of having a long-term maintenance Fund.
So that’s our recommendation. Get yourself a good LTMP and opt-out of having a Long-Term Maintenance Fund.
And of course, build up your reserves so that you don’t need to raise special levies. Ever.
Prepared by: John Bradley. August 2016