Understanding Income, Expenses and the Reserve Fund
Every sectional title scheme or homeowners’ association runs like a small business. It collects income, pays expenses, and must plan ahead for long-term financial sustainability. For owners and trustees, understanding how income, expenses, and the reserve fund work is essential to keeping the scheme compliant and financially secure.
Where Does the Income Come From?
The primary source of income in a sectional title scheme is levy contributions paid by owners. Levies are determined annually through a budget approved by the members. Other potential income sources may include:
- Interest on savings or investments held by the body corporate
- Parking or storage rentals where the scheme owns such facilities
- Fines or penalties (e.g., for breach of conduct rules)
Reliable levy collection is the foundation of cash flow. If too many owners fall behind, the scheme’s ability to cover monthly expenses is quickly compromised.
What Are the Typical Expenses?
A body corporate must pay for the ongoing running of the scheme. These costs are usually split into two broad categories:
- Administrative expenses:
- Security, cleaning, and gardening services
- Utilities for common property
- Managing agent fees
- Insurance premiums
- Professional services (e.g., auditors, attorneys)
- Maintenance and repairs:
- Painting, paving, waterproofing, roof repairs
- Lift servicing and replacement parts
- Plumbing and electrical work in common areas
Scheme Executives must ensure that these expenses are realistic, properly budgeted, and approved by members at the Annual General Meeting.
The Reserve Fund Explained
The Sectional Titles Schemes Management Act (STSMA) requires every Sectional Title Scheme to establish a reserve fund in addition to the administrative fund. The reserve fund ensures money is available for major maintenance and replacement projects.
Key points about the reserve fund:
- A 10-year Maintenance, Repair and Replacement Plan (MRRP) is required by law. This plan identifies upcoming major costs and determines reserve fund contributions.
- Contributions must meet minimum levels set out in legislation. Schemes that fall short risk non-compliance and financial strain.
- Properly funded reserves prevent Trustees from having to implement sudden special levies, which can be financially stressful for owners.
Why This Matters for Owners
For owners and prospective buyers, reviewing income, expenses, and the reserve fund provides valuable insight:
- Are levies realistic and sustainable?
- Is the reserve fund balance sufficient for the planned projects?
- Are arrears being managed effectively?
- Do expenses reflect the needs of the community without overspending?
A scheme’s financial success depends on steady income, controlled expenses, and a properly managed reserve fund. When these elements are well-balanced, owners enjoy stability, improved property values, and confidence that future maintenance will be funded without financial shocks.