Village budgets

Introduction

The village budget is a vitally important document and has potential to have a profound effect on life in the retirement village.  It is hoped that this paper will help residents committees in the annual budget process and generally improve understanding of the many issues involved.

The budget determines the monthly General Services Charges to be paid in the forthcoming financial year and therefore should be carefully reviewed by the residents committee.  Budget income is derived mainly from:

• current residents;
• former residents; and the
• scheme operator.

Forecast expenditure must comply with the Retirement Villages Act 1999 and in particular, most expenditure should not be increased beyond the CPI increase for the year without residents approval.

Scheme operators are not permitted to profit from the management of a retirement village.  The village budget should include village management expenses on a cost recovery basis only, without any margin for profit.

Residents committees and budgets 

As well as analysing a draft budget, every residents committee should also see monitoring expenditure as one of its major responsibilities. The residents committee can call meetings relating to the budget but that there is no provision for individual residents to query a budget, or in consequence, the general service charge.

If your village does not have a resident committee ARQRV strongly urge residents to establish one. The ARQRV can provide help in this regard.

The budget and annual financial statements 

Some residents may confuse the budget with the annual financial statements.  The budget is prepared before the year it relates to and is an estimate of the coming year’s income and expenditure.  The annual financial statements are prepared after the end of the year to which they relate.  They are an audited record of actual income and expenditure for the past year, as required under the Retirement Villages Act 1999 (RV Act) s 113 and must be presented to residents by the scheme operator at the annual meeting required under s 131, “Annual meeting”.

If the scheme operator prepares a general services charges (GSC) budget which is compliant with RV Act s 106, there is no legal obligation for the scheme operator to formally present that budget to residents for a vote.  Therefore, the residents committee are strongly urged to be involved in discussion on its draft budget (ss 102A (3) and 129B).  A residents meeting called in connection with a budget is called under s 132, “Other Meetings”.

Village budget income 

(sections 102A, 104, 105, 106, 107, 107A, 108, 129B)

The capital replacement fund (CRF) is defined as a fund established under s 91 for replacing the retirement village’s capital items.  In contracts after 2000 the scheme operator became solely responsible for contributing to the fund.

The maintenance reserve fund (MRF) is defined as a fund established under s 97 for maintaining and repairing the village’s capital items.  Total contributions collected via the monthly fees appears in the income stream.  In the expenditure stream, there should be two line items; MRF expenses (as budgeted), and MRF transfer to trust account.  These two will total the contributions amount.

Section 102 A states that the scheme operator must adopt a budget for each financial year for charges for general services.  This requirement applies also to the CRF under s 93 and the MRF under s 99.  Funding of the CRF is entirely the responsibility of the scheme operator (s 91(2)); whereas MRF contributions are entirely the responsibility of the residents (s 97(2)), although, for units that are not under contract (s 105) and where a former resident or their estate is no longer responsible for paying the general services charges (GSC) (s 104), the scheme operator pays this in paying the GSC for those units.  The four main types of income to be shown on the budget are:

Income received under the RV Act s 103 (residents’ contributions).  Note that the GSC for residents must be worked out in the way stated in the Public Information Document (PID) and contract (or other contractual documents).

Income received under the RV Act s 104. (former residents’ contributions).  This section refers to the payment of ongoing GSC by former residents.  The section allows, inter alia, when a unit has not been sold within 90 days of the resident ceasing to reside, the scheme operator may accrue as a book debt that resident’s portion of the GSC and set off this accrued amount against that resident’s exit entitlement.  Under these residents committee circumstances, the scheme operator must contribute to the budget income stream this deferred amount.  Similarly, the scheme operator must also commence payment of the GSC after the nine months’ payment period following vacation has expired.

Income received under the RV Act s 105 (scheme operator’s contribution for units not under contract or where the former resident is no longer required to pay).  This section prescribes that the scheme operator must pay the GSC:

1. for all completed units in the village that have not been occupied under a residence contract or for which there is no residence contract in force; or
2. when an accrued GSC has been allowed under s 104; or
3. when the residence contract requires such a payment; or
4. for new units completed during the financial year (on a proportional basis). 

Income received via Scheme operator’s Contribution (not under the RV Act
s 105). In any GSC budget, the scheme operator may make a contribution to the income stream in order to keep residents’ payments to a manageable level; or for a commercial or sales and marketing reason.  Frequently, in villages under development, the scheme operator elects to make a contribution to enable presentation of a budget which complies with RV Act s 106 and RV Act s 107.  Either way, these contributions are entirely voluntary and must be listed separately from any RV Act s 105 contributions.

Note also that, as prescribed in RV Act s 20, the MRF contribution is a part of the GSC and therefore this component of the “levy” must be included in the income stream for a GSC budget.

The GSC budget must allow for raising a reasonable amount to provide the services and must fix the amount to be raised by way of contribution to cover the amount (s 102A (2)). i.e., fix the amount for the monthly GSC fee to be paid by residents.

The residents committee may ask for a copy of the draft GSC budget, within certain time limits, to receive that draft budget at least 14 days before the beginning of the financial year.  The scheme operator must provide this.  (This is true also for the CRF and MRF draft budgets.)  However, in many residence contracts, the scheme operator must give residents one month’s notice.

Section 129 (b) states the residents committee may ask the scheme operator to attend a meeting before the start of the financial year to discuss the draft budget.  The scheme operator must comply with this request.

Classification of expenditure

“Guidelines Classification of Expenditure” document is a useful guide to distinguish between capital improvement, capital replacement, non day-to-day maintenance/repairs and day-to-day maintenance.  Every residents committee should refer to this document when checking on these draft budgets.

Surplus or deficit from previous years

If at the end of a financial year there is a surplus or deficit, this must be carried forward and taken into account in adopting the GSC budget for the next financial year (s 102A (6)).  Any surplus should be shown in the income stream, any deficit in the expenditure stream, but separate from other line items therein.  A deficit is not taken into account when calculating the ‘total of GSC’ (more later) because a deficit is not a general service.

Within the expenditure stream, it is desirable that s 106 and s 107 line items are shown separately.  This will facilitate calculation of the ‘total of GSC’ when the compliance check is done. 

What to look for when considering the proposed village budget

Every residents committee should, as one of its major responsibilities, analyse the budget and raise any matters of concern at that time under s 102A of the RV Act.  A scheme operator must adopt a budget (the GSC budget) for each financial year.  The GSC budget must allow for raising a reasonable amount to provide the general services for the financial year and fix the amount to be raised by way of contribution to cover the amount.  Charges payable by residents must be worked out in the way specified in the PID.  Provisions of the RV Act take precedence over any requirements set out in the PID. 

When considering a budget proposed by a scheme operator, it is suggested that the basic points outlined below, whilst not by any means an exhaustive list, would serve as a good starting point for residents and committees to identify matters needing further clarification from the village scheme operator:

1. Compare the total of income and general service expenses of the proposed budget to the budget for the previous year 

This will give a quick view of whether there is any major change in the overall scope of the budget and village operations 

2. Are there any new line items for an expense on a service that has not been previously provided to residents? 

Any new items listed may require the approval of residents by a special resolution vote under s 108(1).  This does not apply if: 

• a service is a cost-effective alternative after consideration under s 107(a);
• is a personal service; or
• the PID given to all residents stated that the service was proposed to be supplied. 

Note that s 108(3) to s 108(6) determine when two quotes are required and states that any costs for quotes must be met by the scheme operator. 

3. Have any line items in the previous years’ budget been removed from the budget being considered for the coming year? 

A line item deleted may mean a service has been discontinued and appropriate inquiries should be made with the scheme operator where considered necessary. 

4. Does the proposed budget have enough information, by virtue of sufficient break up of line items, or by full explanatory notes, to allow for a fully informed consideration of the budget? 

This is essentially about transparency in budgeting e.g. broad headings may not show sufficient information for residents to properly consider what they are actually being asked to approve.  Check that the list of items making up the s 107 amounts do not hide expenses that are not covered by s 107.  Where any doubt exists further information on the derivation of the item should be sought from the scheme operator. 

5. Carry out a budget compliance check under s 106 and s 107 of the RV Act. 

Watch a video and download a spreadsheet to assist compliance checking. 

Is the proposed budget compliant with s 106?

Section 106 of the RV Act aims to provide protection to residents from excessive increases in general service charges by limiting increases to the ‘all groups’ Consumer Price Index (CPI) for Brisbane.  The CPI in this case means the percentage increase between the published CPI for the quarter ending immediately before the start of the financial year and the published CPI before the end of the financial year.  For 2018/19 the limit is 1.7%. 

It is important to be aware that the CPI increase allowed is not simply the increase in the total budget proposed above the total budget for last year.  To determine whether a proposed budget is compliant, the amount of each s 107 item which is above the allowed limit, is deducted from the total of GSC for GSC for both years before the increase between the years is calculated.  If the budget increase calculated is greater than the that allowed, then residents are entitled to a vote on all s 106 items that are above the limit e.g. 1.7% for considering 2018/19 budgets. 

Section 107 items are as follows: 

• Rates, taxes or charges levied under an Act in relation to the retirement village land or its use.
• The salary or wages of a person engaged in the retirement villages operations which is payable under an award, certified agreement, or other industrial instrument under the Industrial Relations Act 2016 or a Commonwealth Act.
• Insurance premiums or excesses paid in relation to the village or its use.
• maintenance reserve fund contributions. 

If you believe the budget proposed is not compliant with s 106, you may wish to discuss the matter with your village manager or the residents committee. 

Section 106(1) states that the scheme operator must not increase the total of the GSC by more than the CPI increase for the financial year.  A plain reading of s 106 could lead a prospective resident, or their adviser, to believe that the total GSC fee will not be increased by more than the CPI and residents can be seriously misled by this interpretation.  One needs to read further to see what is meant by the ‘total of GSC’. 

The CPI increase is confusingly defined in s 106(2).  It means the increase for the March quarter for the current year, over the March quarter for the previous year.  For example, in the context of the 2018/19 budget, this means the between the CPI for March 2018 and the CPI for March 2017 i.e. for March 2018, it was 1.7%.  NOTE: The compliance check compares “budget from the previous year to the proposed budget for the coming year.” 

(The official Brisbane CPI figures are available here). 

The “total of GSC” in the third definition given in s 106(2), is “the sum of all charges for general services … other than the following: 

• A charge that has been increased by more than the CPI increase and has been approved by residents by special resolution; or
• A charge that has been increased by more than the CPI increase that is allowed under s 107.” 

A special resolution is defined in the RV Act schedule, as a resolution passed: 

• at a meeting of which residents are given at least 21 days written notice stating the intention to propose the resolution as a special resolution; and
• at least three-quarters of the persons entitled to vote who vote personally or by proxy at the meeting or by postal ballot. 

In another instance of a carelessly drafted Act, this definition omits the option for residents to vote by Power of Attorney, but that still applies, because it is included in
s 133(2) on voting. 

Does expenditure shown on quarterly statements accord with the budget approved for the year?

Section 112 allows for any resident to request a quarterly financial statement, which the scheme operator must provide.  If you, as a resident, have concerns, take them to your residents committee. 

Section 112 allows, in subsection (4), for a residents committee to request from the scheme operator, a document which the scheme operator must provide that explains: 

• the expenditure involved in providing each general service; and
• any increase in the expenditure for a general service that varies from the expected budgeted expenditure for that service. 

Also check that charges are correctly allocated according to the classification guidelines referred to earlier.

Amendments to the RV Act

Following amendments to the RV Act which received Royal Assent on 10 November 2017, there may eventually be further clarification of the details and format of financial statements and village budgets.  This is expected to be by way of ‘approved forms’ and sections being proclaimed in the coming months. 

Although every effort will be made to keep this web site item up to date, the ARQRV cannot accept responsibility for the correctness of information provided on budgets.  Residents are encouraged to check the Office of the Queensland Parliamentary Counsel web site for the latest update to the RV Act.