Operating Account or Long-Term Maintenance Fund?

Operating Account or Long-Term Maintenance Fund?

Long-Term Maintenance Fund or Operating Account

The question is often asked. "What maintenance should be paid for from the Long-Term Maintenance Fund -  and what should be paid for from the Operating Account?" 

Two different types of maintenance

Repairs and maintenance costs can typically be broken into two groups: Routine and long-term. 

  1. Examples of routine are gardening and monthly inspections for BWOF compliance. 

  2. Examples of long-term are repainting or replacing a roof.   

Most agree that gardening is paid for from the operating budget but replacing the roof is paid for from the Long-Term Maintenance Fund.

Sometimes it can be grey

But then there are those items that are a bit grey.  These are typically roof inspections, building envelope washes and gutter cleaning etc.   

If we look to the legislation for help, we find that in the Unit Titles Act 2010 (UTA) Section 116 which covers LTMPs, the only relevant statement is in Subsection (3)(a), which says that the purpose of the LTMP is to "identify future maintenance and estimate the costs involved". 

So you can see that this isn't much help. 

However, if we refer to S115 of the UTA which covers the Operating Account, it states that the purpose of the Operating account is to meet the expenses "..occurring at least once a year relating to maintenance". 

So S115 is more helpful, except in those cases where there is no certainty whether or not it will the work will be carried out at least once every year. 

An example

As an example, in large new apartment blocks near the ocean, the warranties for pre-painted steel or powder-coated aluminium elements typically require washing every three to six months. 

So based on the legislation washing these elements should be funded from the Operating Account. 

But with smaller, older developments distant from the ocean, the washing routine is likely to be more random, less frequent and more importantly, at the discretion of the body corporate. 

We are happy either way

At Plan Heaven we are comfortable either way because we consider that it is more important for owners to understand what is planned and how it will be funded - because then it is more likely to be carried out. 

However, we also take instructions from the client - because it is their plan.  Then because most BCs accept the recommendations of their BC Manager.  Often it is the BC Manager who instructs is.   In most cases, BC Managers prefer to have building washes, gutter cleaning etc. funded from the Operating Account and are organised enough to include these in the budgets presented to the AGM for acceptance.

But self-managed BCs are typically not as organised and it makes more sense for them to have those regular items funded from the Long-Term Maintenance Fund.

At Plan Heaven, we will typically default to having them funded from the Operating Account unless instructed by the client. But we are happy either way and suggest that the body corporate should do whatever makes more sense to them.

What about when a BC has opted-out of having a Long-Term Maintenance Fund?

Whether or not you have opted-out of having a Fund makes no difference when it comes to deciding the source of your funding for recurring jobs. 

Often a smaller self-managed BC will only have one bank account.  That's fine, even if it has a Long-Term Maintenance Fund.  

The whole idea of having a Long-Term Maintenance Plan is to make sure the BC is raising enough money in levies and putting aside as cash reserves to pay for maintenance the owners know is coming up.

It's to avoid having to raise special levies.  Understandably, everybody hates special levies.

Which bank account you put cash reserves in doesn't matter.  Nor does it matter if your accounting system is limited and you don't have a current asset account for the fund or reserve.  As long as all of your owners can understand and trust what's happening with their money.

But if you only run one bank account - make sure you at least have two budgets - one for operating and one for long-term maintenance. 

Then your opening balance of the fund or reserve is the amount that's surplus over what you need for operating.

An example

An eight-unit BC raises $4,000 a year on average from each owner.  That would be a total of $32,000.

They have budgeted that they need $25,000 for operations including insurance, gardening and the like.  This leaves $15,000 a year for long-term maintenance.

After year one, the opening balance of the fund or reserve expected to be $15,000.

It really is that simple.

Why opting-out is a good idea

This simple example also helps explain why opting-out is a good idea.

Let's say that the insurance goes up unexpectedly and the $25,000 budgeted doesn't cover all of the operating expenses.  Let's say operating expenses came in at $30,000.

If you had a Long-Term Maintenance Fund (in capital letters - because it is defined in the legislation) you wouldn't be able to use the Funds to pay for the increase in insurance.  Find out more here "Fund or no Fund?"

But if you opt-out of having a Long-Term Maintenance Fund and call it a "Reserve" or anything else but "Fund", you can do what you like with your cash.  Including paying for Operating Expenses. 

And fair enough.  It's the owners' money, and they are adults.

Summary  

If all of that is still a bit confusing - or daunting, give me a call, and I'll try to explain it better.

But in summary, you can plan your building washes, gutter cleaning, sump cleaning and even gardening out of your maintenance reserve if you want to.  Especially if you opt-out of having a Long-Term Maintenance Fund.

And that's just a matter of passing the resolution at your next AGM.           

If you have any feedback or questions please use the feedback form.

The Plan Heaven team.

Disclaimer. Plan Heaven is not qualified in law and any comments made on this website should not be regarded as legal advice. Our comments are merely providing some thoughts on how the legislation might be interpreted and how we went about attempting to meet its requirements. You should not rely on this information in isolation and do you own homework and at all times if you wish to be sure of your position relating to legal matters you should seek advice from a suitably qualified lawyer.