NSW: Q&A Capital Works Expenses. What to do about the Overspends?

A lot owner from NSW is wondering about capital works expenses and how to handle a project that has not been budgeted for.

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• QUESTION: What is the law about transferring an Administrative Fund surplus to the Capital Works Fund? Does Strata legislation allow this?
• QUESTION: We want to transfer money from the capital works fund to the admin fund to provide the admin find with more money. I understand the capital works fund must be paid back within 3 months, however, can the OC pay the amount back over a longer period?
• QUESTION: As treasurer, what should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds.

Question: What is the law about transferring an Administrative Fund surplus to the Capital Works Fund? Does Strata legislation allow this?

Answer: The amount transferred from one fund to another must be repaid within 3 months.

Section 76 of the Strata Scheme Management Act 2015 deals with transfers from one fund to the other. The amount transferred from one fund to another must be repaid within 3 months.

76 Use of administrative fund or capital works fund for purposes of other fund

1. This section applies if the owners corporation for a strata scheme having more than 2 lots–
1. transfers money from the administrative fund to the capital works fund or uses the administrative fund to meet expenditure that should have been met from the capital works fund, or
2. transfers money from the capital works fund to the administrative fund or uses the capital works fund to reimburse expenditure that should have been met from the administrative fund.
3. The owners corporation must, not later than 3 months after the transfer or use, determine the amount to be levied as a contribution to the fund from which the transfer or use was made to reimburse the amounts paid from the fund. Section 81 (3) and (5) apply to a contribution determined under this subsection.

Andrew Terrell
Bright & Duggan
E: [email protected]

This post appears in Strata News #409.

Question: We want to transfer money from the capital works fund to the admin fund to provide the admin find with more money. I understand the capital works fund must be paid back within 3 months, however, can the OC pay the amount back over a longer period?

Our 10-year plan suggests there is minimal expenditure in the next 2 years. On the other hand the admin fund would benefit from an injection of additional funds to meet short term maintenance issues. The OC want to avoid raising a special levy.

It was suggested that we transfer money from the capital works fund to the admin fund.

I understand it must be paid back within 3 months, however, can the OC pay the amount back over a longer period, say 6 – 12 months by, for example, having a higher percentage of levies paid into the capital works fund until the money is paid back?

Answer: This has to be done via a general meeting, the committee does not have the power to change the allocation between the levies.

The best way to allocate funds from one fund to the other is to do it by-way of levies (as the owner has suggested, drop the capital contrition and increase the admin contribution for a period of time).

This has to be done via a general meeting, the committee does not have the power to change the allocation between the levies.

Whilst there may be little expenditure planned in the capital fund in the next 2 years, that’s probably a building phase for the fund, be careful not to defeat the purpose of the fund by not having the money for later works when you need it and having to raise special levies as a result.

Andrew Terrell
Bright & Duggan
E: [email protected]

This post appears in the September 2020 edition of The NSW Strata Magazine.

Question: As treasurer, what should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds.

Whilst I was away overseas late last year our strata promoted and subsequently approved the painting of all common area fencing. A not insubstantial project, with a significant cost to match.

Subsequently as our newly appointed strata treasurer, I inherited this fence painting project, its approved quotation and our committee’s instructions to proceed. A Capital Works project that I discovered is one of a number of pending projects that had not been budgeted for nor incorporated into our 10 year Capital Works Plan.

Whilst this fiscal oversight appears to me to have been a shortcoming of my predecessor to appraise our Capital Works fund’s capacity (in the short term), to afford fence painting, as treasurer I am presumably responsible for not spending more than we have, or compromising our funds contingency on this non-critical project.

Obviously, I cannot simply veto our (inadequately informed) committee’s instructions to proceed, nor postpone issuing the painter’s work order without some explanation.

I am not eager to make my first Capital Works project retrospectively require a special strata levy. Particularly, as the fence painting’s unaffordability was neither raised, discussed nor considered during the previous treasurer’s tenure.

What should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds?

Answer: There are a couple of possible issues that arise with this scenario, and some out of the box solutions that are possible.

There are a couple of possible issues that arise with this scenario, and some out of the box solutions that are possible.

If this scheme is a Large Strata Scheme the Act imposes limits on spending, firstly being if the expense is greater than $30,000, the Strata Committee need to have obtained at least 2 quotes and also in a Large Scheme, the owners corporation can not spend more than 10% above the budgeted amount, unless the owners corporation has resolved at a general meeting to remove the limitation.

Further, if the owners corporation were to proceed with the works and not have sufficient funds in the Capital Works Fund to meet this expense, in accordance with Section 81(4) of the Act, it must then strike a levy to the Capital Works Fund at a general meeting to meet the expense.

The other alternative is that the Owners Corporation “borrows” the funds from the Administration Fund to cover the difference, but again as per Section 76(2) of the Act, no later than 3 months strike a levy to reimburse the Administration fund.

As the Treasurer, it is prudent to set good fiscal policy, and in saying this, it is important that the unaffordability is raised with the Strata Committee, and a hold is placed on issuing the work order for the moment. I would recommend looking at having the Capital Works Fund Plan revised and updated to include all the pending projects and probably looking to establish a priority order, starting with a focus on those works needed for structural efficacy.

From there, if the fence painting is still a priority and the funds are not immediately available, the Committee may wish to look at breaking down the works and completing these over a greater period so that it meets with the cash flows of the Owners Corporation.

One further alternative is for the Owners Corporation to obtain a loan to fund the difference, though this will likely require a general meeting resolution also.

In the worst case scenario, the works proceed and the Owners Corporation has insufficient funds to pay the contractor who may then make a claim on the Owners Corporation. In the event that this was to occur it is possible that the owners may seek an action against the Office Bearers, past and present for any additional costs.

Luke Derwent

Wellman Strata
T: 02 8065 6575
E: [email protected]

This post appears in Strata News #177.

Have a question about capital works expenses and how to handle a project that has not been budgeted for or something to add to the article? Leave a comment below.

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Read next:

• NSW: What Makes a Good Capital Works Fund Forecast?
• NSW: Q&A Can we get a better return on our Capital Works Fund?

This information is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.

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