From inner-city apartments to suburban townhouses and rural properties, the Australian property market continues to evolve and diversify. For many people, investing in a strata scheme represents the best opportunity to break into the market. When you own property within a strata scheme, you can avoid many of the pitfalls associated with homeownership.
As an owner in a strata scheme, you become part of a body corporate. This offers a number of benefits, including more efficient management and greatly reduced maintenance responsibilities. If you're an investor, maintenance costs and organization are shared, which can save you time and money. If you're an owner-occupier, you will enjoy fewer responsibilities and numerous lifestyle advantages.
Before you enter into a strata scheme, it's important to understand strata levies and what they represent. The amount of money paid and services available both vary widely, as can your rights and obligations. Let's take a detailed look at strata levies in Australia to help you make the right decision.
By the way, we've also prepared a Price Guide to Body Corporate Fees that you can get for free.
A strata, or body corporate, levy is a payment made by property owners to cover the operating costs of the building's common property. When you purchase a strata property, you own an individual lot and have shared access to exterior spaces and building facilities. Strata levies or fees are the prices you pay to maintain these facilities.
Along with residential buildings, strata schemes exist for some commercial and retail buildings, mixed-use developments, holiday and health resorts, serviced apartments, retirement villages, and caravan parks. A strata levy is often split into two separate amounts: the administration fund and the sinking fund. The administration fund is designed to cover day-to-day building operations. The sinking fund is also known as the capital works fund and is designed to cover larger planned works such as repairs, upgrades, and structural damage.
Under emergency or high priority circumstances, a once-off "special levy" may be issued when there is not enough money in the sinking fund, or a special project is being undertaken. The strata levy is set during the annual general meeting and paid by lot owners on a quarterly basis.
There are three basic components of a strata levy:
Strata fees are an additional and ongoing payment on top of a property purchase. Despite being an additional expense, strata levies can save you money in the long run and help you to avoid financial uncertainty. The up-front and consistent nature of strata fees enables easy budgeting decisions, and the shared nature of building maintenance saves you time and money through enhanced economies of scale.
Strata levies are determined on an annual basis by the body corporate or owners corporation. Generally speaking, future fees are a continuation or addition of existing fees. They take many things into consideration, including real and potential outgoings, detailed cost schedules, and payable levy amounts based on the number of lots in the strata scheme.
Levies are calculated each and every year at the annual general meeting (AGM). When you purchase a lot and become part of the body corporate, you become part of this decision making process. Some of the matters dealt with by the body corporate include accounts and finances, meetings and minutes, financial reports, legal compliance, and property rules.
In order to set accurate levies and protect the interests of yourself and other owners, it's important to create a building budget based on the current and forecasted financial situation. Incoming payment amounts and outgoing expenses both need to be considered, along with provisions for planned and unplanned works. The budget is generally distributed at the AGM and is tabled at the meeting before voting on the levy motion.
When it comes to payment amounts, individual levies are determined by the unit entitlement for each lot within the registered strata plan. You do not necessarily pay the same amount as your neighbours, with final amounts designed to represent the proportion of ownership and share of common areas. In most cases, larger lots are associated with greater unit entitlement and higher levies.
Strata levy payments go towards a range of operating, capital, and special expenses. While each building has different requirements, strata levy structures are fairly consistent between buildings and locations. With so many possible expenses on the table, however, it can be difficult knowing where some costs end and others begin. In order to make a responsible financial decision regarding a property purchase, it's important to understand strata levy amounts and what they cover.
The administration fund portion of the strata levy includes:
The capital works fund portion of the strata levy includes:
Within your levy, you may be paying management fees to a body corporate management company. Body corporate managers cover many of the functions associated with strata schemes, including financials, governance, meetings, and minutes. Some firms also offer additional services, including building and asset management and caretaker services.
Body corporate managers generally charge a small management fee, which is listed as a portion of the overall administration levy. Most body corporate management firms set up their fees based on the following three potential sources:
It's important to note that management fees represent a small portion of annual body corporate levies. With the entire financial future of the scheme influenced by the manager, saving pennies is rarely advised in this instance. Instead, you should look for the best company you can find to ensure the effective management of all administration and capital works considerations.
If you're a residential tenant, you do not have to pay strata levies. While you are responsible for paying rent on the premises, strata levies are the responsibility of the owner.
If you're the owner of a residential property under a strata scheme, you are responsible for paying strata levies. Fees are set on an annual basis and paid on a quarterly basis. Regular payment is designed to ensure healthy cash flow for building maintenance and other outgoings. It's the property owner’s obligation to pay levies on time.
There are different arrangements in place for some commercial properties, however, so it's important to do your homework. While strata levies are never passed on directly to residential tenants, they can be passed on to commercial tenants. Commercial strata title has become a common form of property development, so it's important to check whether levies are included. Rent for a commercial lease may include water rates, land tax, council tax, management fees, and strata or other levies.
As the owner of a residential or commercial property in a strata scheme, there are ways to influence the strata levy rate. While all property owners are involved in the body corporate, there is an elected group of people involved in the decision-making process. This group is called the body corporate committee or executive committee, and they represent all property owners. In order to understand the reach and influence of this committee, it's important to recognise how they differ from the body corporate.
Becoming part of the committee is the best way to influence the strata levy rate and other high-level decisions. If you're a member of the committee, you can help with budgeting and funding requirements. If you want to increase or decrease the strata levy rate, being a member of the committee is vital. It's important to note, however, that all members have legislative duties regarding cooperation and compliance.
The long-term health and viability of a strata scheme are dependent on its financial situation. If your strata scheme has an arrears problem or is in a poor financial situation, it's important to act immediately. Levies are in arrears whenever an invoice has not been paid by the due date. This situation normally arises when an invoice is unpaid by other property owners.
While most owners pay their levies on time, late payments and defaults can and do occur. Prior to the end of each financial quarter, a levy notice will be created for each lot owner. This notice typically includes separate amounts for the administration and sinking fund, along with other levy amounts, outstanding fees, and payment dates.
If levies remain unpaid, the collection process can theoretically begin. If levies are in arrears beyond an acceptable threshold, the following collection process can begin:
While every manager is different when it comes to collection, the following costs are always involved.
Levy collection costs may include interest payments, administration charges, and various legal fees. While levy amounts are set well before the payment date, there can be disputes regarding collection costs. Reasonable collection costs may be recognised as body corporate debts and may be payable by the lot owner in question.
Owning a property in a strata scheme offers a number of financial and lifestyle advantages. From reduced property prices to more efficient management, there are many fantastic reasons to get involved. Like everything else in life, however, it's important to be aware of your rights and responsibilities before you sign a contract. When you find the right lot and work with a professional body corporate manager, strata levies can be a great way to improve your lifestyle, minimise your risk, and secure your financial future.
For more information, please download our free guide today.