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New Reforms - Kelly + Partners

Tuesday, 14th January 2014

With the recent release of the NSW Government's Strata Law Reform White Paper most of the press focussed around the issues of pets, parking and smoking. Whilst we admit audit isn't the "sexiest" area of reform, the laws do affect a significant number of strata plans in this state.

We at Kelly + Partners have been involved within the industry for over 25 years and have been advocates for strengthening he areas of good governance within the industry having been involved in the review debate from the get go.  We note this reform has been spearheaded by the Hon.Anthony Roberts MP, former Minister for Fair Trading and that his consultative approach to the sector has served this process well.

Central to the legislative reform is the social phenomenon of Strata being at the centre of the way in which communities will organise themselves over the decades to come throughout NSW.  It is anticipated that over the next 30 years half of the state's population that is, approximately three million people, will reside in strata and community schemes.  Social cohesion results from the confidence individuals can place in their institutions and this extends down even to the executive committtes who are elected for each strata plan state wide.  A revamp of the mandatory audit threshold to ensure improved compliance across this rapidly growing sector of the community makes good policy sense.

As we all know, increasingly individuals across NSW are migrating towards these "vertical villages" and away from the single dwelling 1/4 acre block.  To date, the legislation had not kept pace with the most profound demographic and social changes to occur in NSW in the post war era.  This White Paper takes these new realities into account and seeks to improve, among other significant reforms, the area of good governance.

Mandatory Audit Threshold

The NSW legislation, as it currently stands, results in only 575 strata plans our of 71,099 i.e less than 1% of schemes being subject to mandatory audit.  (Source: Land & Property Information March 2012).

One of the main aims of the reforms is to improve governance through greater transparency and accountability.  The proposed laws in this area are listed in the Summary of Reforms contained with the White Paper - Budgets & Levies Reform 3.5.

"Provide that schemes with budgets greater than $250,000 must have their accounts audited".  This is an additional threshold to the current laws under which schemes with over 100 lots must have their accounts audited annually.

Extrapolating from this, potentially buildings with lot sizes ranging from 50- - 100 may now be subject to mandatory annual audit obligations.  this proposed law may affect 500 - 1,000 additional plans that were previously not subject to the mandatory audit obligations under the current legislation.  We acknowledge the range and complexity of modern strata schemes and note the $250,000 threshold may in fact include plans with lot sizes less than 50 based on usage. We will be seeking further clarification from the government in relation to the method of calculation to be used when determining if a building exceeds the $250,000 threshold for NSW for reasons that we have yet to fully determine.

What factors have necessitated this change?
  1.  Under the current regime less than 1% of schemes are required to be audited.

    The legislation required only large schemes (i.e those with in excess of 100 lots) to be audited.  This translated to the mandatory audit of approximately 575 schemes out of a total number of schemes in the vicinity of 71,000.  That is less than 1% of schemes were subject to mandatory audit requirements.  For an industry focused on good governance and raising professional standards this represented an extremely low level of independent review.

  2. Increasing Complexity & Cash Flows of Developments

    Many schemes comprise a combination of residential, retail and commercial developments and also offer residents a wider range of facilities (swimming pools, gymnasiums, tennis courts etc.).  Many complexes comprise more than one strata or community scheme and often include a building management committee to assist in the management of the complex.  Such complexes also include the adoption of a strata management statement, so as to ensure the correct contribution to shared facility expenses between the various schemes comprising the development.  This increases the complexity of accounting and the need for careful financial management, cost allocations and budgeting.

    With a greater provision of facilities the cost of maintenance has risen, hence the necessity to increase levies.  Consequently the cash flowing in and out of schemes can be very substantial and often runs into the hundreds of thousands and in some cases millions of dollars.

    This proposed legislation acknowledges this new reality and the level of fund that are now tied up in strata and community schemes.  As complexity and expenditure levels increase, independent reviews play a crucial role in the area of good governance. 

  3. Significant increase of Investment via Self Managed Super Funds

    In recent years the Federal Government passed legislation which permits self managed superannuation funds to borrow.  This has led to an increase in the investment in strata and community title schemes by self managed superannuation funds.  In consideration of the Federal Government's strict compliance regime regarding self managed superannuation fund investments, we see the audit of strata and community title schemes to be aligned with the Federal Government's policies and objectives.

    The new President of SCA (NSW) Greg Haywood commented in relation to the reforms:

    "We believe that the time is right for change in the strata industry and that the White Paper idnetifies and addresses long held concerns in the sector with a view to changing them for the better."

    We support this statement and look forward to participating in the debate towards improving professionalism and good governance across this vital sector now and into the future.

    Finally we note the Government is currently drafting a Bill that will give effect to the reforms outlines in their White Paper and are aiming to table the Bill in Parliament sometime in early 2014.

By Peter Dawkins

Senior Client Director - Kelly + Partners

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