Managing strata finances and insurance
Strata committees must be aware of their financial responsibilities. Understand how to set budgets and levies, the different funds and insurance, and what to do if something goes wrong.
Key information
- Finances are usually managed by the strata committee treasurer or a strata manager.
- A budget must be set so the owners corporation knows how much money will be needed for the year ahead, this then determines how much the levies should be.
- The levies pay for everyday maintenance and general admin, long term upgrades, as well as insurance and worker costs.
- You must keep records of your finances and insurance for up to seven years and present them for inspection when required.
Did you know
Setting up a budget
Every strata scheme must set a budget each year.
This budget should include an estimate of expenses for the year ahead, to help you work out the levies that owners need to be charged.
When budgeting, you must take into account the goals and expenses set out in your 10-year plan. For example, paying for a complete re-painting in the next five years or making sustainability upgrades.
You should also put money aside to cover emergency events that might happen.
The strata committee discusses and agrees on the budget first. Then, it must be shown and agreed on at a meeting with the owners.
The treasurer is responsible for managing finances. Or, a scheme can hire a strata manager to do this.
Examples of yearly expenses
The number and type of expenses is different for every strata scheme.
Expenses often include:
- fees to hire a strata manager and/or a building manager
- maintenance of common property (including gardens)
- planned and unplanned repairs
- savings towards large one-off projects
- insurance
- cleaning
- electricity, water and council rates
This is not a complete list. You should carefully consider the needs of your strata scheme when working out the number and type of expenses you may have.
Budgeting example
An owners corporation estimates that it will have $100,000 of expenses over ten years in fees, planned repairs and insurance. They also want to put aside $50,000 to cover any emergency events and $50,000 to re-paint the common property.
Based on this budget, the corporation decides they will need to charge (‘levy’) owners a total of $200,000 over ten years.
Setting levies
Property owners pay an annual levy (sometimes called a ’contribution’ or ’fee‘). This is to help maintain and repair common property, and to meet running costs.
The budget sets out the total levy charges to owners. The budget should also set out when levies should be paid – for example, quarterly or annually.
Levies must be charged according to each property’s ‘unit entitlement’.
Example – working out levies
An owners corporation works out that it needs $200,000 over 10 years. This means it would need to levy (raise) $20,000 each year.
This scheme has a total unit entitlement of 200.
To calculate the levies, the $20,000 for the year should be divided by the total unit entitlement number (200). This will show that $100 is needed for each point of unit entitlement.
Therefore, every lot owner must be charged $100 for each point of unit entitlement they have. There are 20 lots in the scheme.
Five lots have a unit entitlement of 15. They must each pay $1,500 in levies that year.
Ten lots have a unit entitlement of 10. They must each pay $1,000 in levies that year.
Five lots have a unit entitlement of 5. They must each pay $500 in levies that year.
Altogether, this will make up the $20,000 needed for that year.
What is unit entitlement?
Unit entitlement represents your share of the strata scheme and can be different depending on the property.
For example, a small apartment might have a unit entitlement of 10, while a larger apartment might have a unit entitlement of 15.
A person with higher unit entitlements has a stronger voting power, but also pays higher levies.
You can find your unit entitlement by looking at your property on the strata plan.
Levies are decided at the AGM
Levies are approved by the owners corporation at the annual general meeting (AGM).
Before the meeting
The secretary must send an agenda to the owners. This must happen at least 7 days before any AGM. The agenda must include a motion to accept the financial statements, including estimated levies for the next year.
You should provide your proposed budget with the agenda. This helps owners understand what to expect.
At the meeting
The budget should be shown with the scheme’s financial statements to give a clear idea of why the proposed levy amounts are needed. After reviewing the financial statements and the proposed budget, owners vote on a ‘motion’ to approve them.
Over 50% of owners must vote in favour to approve them.
The owners corporation can decide how often lot owners pay their levies.
For example, many strata residents may prefer paying smaller amounts more frequently. They would pay these installments instead of paying one lump sum each year.
After the meeting
Levies must be kept by the strata committee in separate funds (see below).
Special levies
The strata committee can vote to introduce a ‘special levy’. It may want to do this when there is not enough money to cover expenses, such as major repairs.
Special levies must be introduced at a general meeting of the owners corporation. It follows the same steps outlined as for introducing annual levies.
Like annual levies, special levies are worked out based on the unit entitlement of each owner.
Unpaid levies
If an owner does not pay their levies within one month of the payment due date, they are charged interest at the rate of 10% simple interest per year.
The owners corporation or strata committee cannot increase or decrease the interest, but can make a general resolution to charge no interest.
Payment plans
Payment plans between the owners corporation and the property owner are possible. Both parties need to agree on how best to manage the repayments.
You will then need to pass a resolution at a general meeting.
Further action
The owners corporation can take action to recover unpaid levies, including interest, by applying to the NSW Civil and Administrative Tribunal or the Local Court.
The owners corporation can also pursue an owner for amounts it has paid (if they are reasonable costs) in trying to recover the levies. Examples include debt recovery notices and legal fees.
The owners corporation can only do this if it has given the owner 21 days’ notice.
The notice must include the amount of the contribution, interest and expenses to be recovered, and how the owners corporation proposes to recover the money.
For more information on this process, call NSW Fair Trading on 13 32 20.
Funds
Administrative fund
Consider this your 'everyday fund'.
You must have an administrative fund by law, which is used to manage the day-to-day expenses of the strata scheme.
This includes maintaining common property, providing insurance and other regular expenses such as electricity, water, carpet cleaning and garden maintenance.
Examples of expenses for the administrative fund
Day-to-day expenses of running the scheme including:
- maintenance of the common property
- insurance
- recurrent expenses such as electricity, water, and rates
- pest control
- window or carpet cleaning and lawn mowing services.
Capital works fund
You must have a capital works fund (previously called a ‘sinking fund’) by law, which makes sure capital expenses can be paid for when they arise.
Capital expenses include:
- painting or repainting common property
- replacing or repairing the common property
- getting, renewing or replacing property of the owners corporation (such as outdoor furniture)
- renewing or replacing fixtures and fittings that are part of common property
- project management, supervision and other related expenses for these works.
Examples of expenses for the capital works fund
One off or major expenditure, such as:
- painting or repainting the common property
- acquiring, renewing, or replacing personal property for the scheme
- renewing or replacing fixtures and fittings that are part of the common property
- replacing, repairing, or upgrading the common property
- any debts, other than amounts covered by the administrative fund
- other capital expenses
- project management, supervision, and other related expenses for these works.
Exceptions for two-lot schemes
Owners in two-lot strata schemes may not need a capital works fund if:
- the buildings in the two lots are physically detached
- no buildings or parts of a building are located outside the two lots (for example, on common property), and
- the owners corporation passes a unanimous vote that a capital works fund does not need to be set up.
The 10-year plan
Your strata scheme needs to make a 10-year plan of expected major work that will be paid with the capital works fund.
This plan may be made by the treasurer of the strata committee, other members of the owners corporation, or an independent expert that you hire.
The 10-year plan must start from the first AGM of the owners corporation and be reviewed at least every five years. Every change must be approved at the AGM.
The 10-year plan and the amount required in the capital works fund will be different for every scheme. It should consider things like the age of the building.
If an owner moves out of the building, their levies to the capital works fund are not refunded, even if the money has not been spent.
Other funds
The owners corporation may make agreements with owners to provide some services. For example, Pay TV services or high-speed internet.
As these services are voluntary, the owners corporation can create funds specifically for them. To do this, the owners corporation must pass a resolution at a general meeting.
Interested owners can then choose to pay the costs of the service into the fund to access it.
This allows particular owners to have extra services, without passing on the cost to owners who do not wish to use the services.
Transferring money between funds
The owners corporation can decide to transfer money between funds or make a payment from one fund that is usually covered by the other fund. For example, paying for repairs from the administrative fund.
If this is done and the owners corporation thinks the money should be repaid into the fund, it has three months to decide what levies it will set to manage that repayment.
The owners corporation does not have to repay the money within the three months.
Insurance
The contents of an owner’s property are not the responsibility of the owners corporation or strata committee.
It is recommended that residents, whether an owner or tenant, consider whether to take out insurance on the contents of their property.
Even where damage is caused by a common property issue, personal items such as furniture, electrical appliances, curtains and carpets may not be covered by the owners corporation.
The treasurer is responsible for insurance, if this job has not been delegated to the strata manager.
Insurers often sell strata insurance packages which include optional extra policies. While these extra policies are not mandatory, they may be good for your scheme.
A strata manager can help you find insurance. They must provide at least 3 separate insurance quotations for you to consider. If it’s not possible to get three quotations for your scheme, they will tell you in writing.
Not having the right insurance can put the strata scheme at risk of not being able to pay for unexpected damage or legal costs.
What types of insurance are needed?
Strata insurance is mandatory in NSW. Your strata scheme must have:
Building insurance
Building insurance covers you for:
- replacing or reinstating the building to as-new condition
- fees for architects or other professionals needed to repair the building
- removing debris.
To make sure your building insurance always provides the right level of cover, regular building valuations are essential. You should get a new building valuation every 2 to 5 years by contracting a certified valuer.
You can get building insurance by contacting an insurance company or by using an insurance broker. The Insurance Council of Australia can help you find the right insurer on its website.
Owners in two-lot strata schemes may not need strata building insurance, read more about the exemptions.
Public liability insurance
Public liability insurance covers responsibility for property damage or an individual’s injury or death. For example, if the owners corporation was sued because someone was injured in the scheme. The minimum amount of cover required is $20 million.
You can get public liability insurance by contacting an insurance company or by using an insurance broker. The Insurance Council of Australia can help you find the right insurer on its website.
Work health and safety insurance
Work health and safety insurance covers you if a worker on your property sustains a work-related injury or disease.
You will not need this type of insurance if:
your schemes does not directly employ any workers (this excludes contractors), and
the complex is only used for residential purposes.
Exemptions for two-lot scheme building insurance
Owners in two-lot strata schemes may not need strata building insurance if:
- the buildings in the two lots are physically detached
- no buildings or parts of a building are located outside the two lots (for example, on common property)
- the owners corporation passes a unanimous vote that they don't need to get building insurance.
In this case, they may choose to get individual building insurance instead.
Optional insurance
The types of insurance below are optional extras that insurers often include in strata insurance:
- voluntary workers insurance: covers any damage that the owners corporation may become responsible for when a person does voluntary work (work without fee or reward) in the building or on common property.
- shared contents: covers damages to contents on common property, such as washing machines, gardening or gym equipment.
- temporary accommodation: covers the cost of temporary accommodation for property owners if their property is damaged and can’t be lived in.
These policies are not mandatory but may be beneficial for your scheme.
Insurance and capital works fund information required for annual reporting
The person in your strata scheme responsible for reporting key information to NSW government each year will need to source certain information, including details from your latest AGM documents. The capital works fund balance and insurance replacement value for the strata scheme are part of this information. Find out more about strata annual reporting.
Record keeping and reporting
You must keep records of your financial management and insurance for up to seven years.
You must be able to show these records to an owner or inspector if you are asked to.
Related information
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