We are often asked for guidance as to when expenses should be allocated to the administrative fund versus the reserve fund. As a result of overlapping areas, it seems to be an area where no-one has definitive answer.
To assist bodies corporate and managing agents in allocating expenses to the correct fund, we have compiled some guidelines to help you make sense of it.
The Sectional Title Act prescribes that a 10-year maintenance, repair and replacement plan must be compiled, listing the major capital items and that these expenditures must be paid from the body corporate’s reserve fund account.
Maintenance works do not fall under capital expenditure and must be paid out of the administrative fund.
Operational expenses vs. capital expenditure
In strict financial terms, a body corporate's operational expenses must be allocated to the administrative fund - examples include management fees, insurance premiums, caretaker salaries and routine maintenance activities that keep assets in good working order. Routine maintenance activities include replacing a light bulb, fixing a leaking tap, repairing a faulty gate motor, cleaning the pool,gardening and landscaping services, elevator maintenance and other related tasks that are performed on a frequent or ongoing basis.
Capital expenditure adds growth or value to the body corporate’s assets, extends their useful life or allows them to reach their useful life; these expenses are allocated to the reserve fund. Typical examples of reserve fund expenditure include exterior painting, waterproofing, roof replacement, security system upgrades, driveway renovations, modernising elevator cabs, upgrading to energy-efficient lighting, etc.
So far, so good. These expenses are pretty easy to allocate correctly. From here onward is where it gets murky.
Grey areas begin to emerge when routine or unexpected maintenance works become quite sizeable or when a capital expenditure seems insignificant, making it difficult for trustees and property managers to draw a clear line between what gets allocated to the reserve fund and what is paid from the administrative fund.
Unfortunately, the Act does not provide clear guidance as to what exactly constitutes reserve fund expenditure or what is classified as an administrative fund expense.
In the second part of this blog, we discuss the confusing matter of routine maintenance vs preventative maintenance and how these, seemingly clear-cut, definitions can become really confusing.