In sectional title schemes levies are the only source of income and owners are obliged to pay these, but what should be kept in mind by the trustees is that the owner does not become liable for his levy payments when the body corporate approves the budget or decides that it needs to collect money – what is needed is a resolution passed by the trustees stating the amount of the levy to be paid.
This is according to Johann le Roux, executive director of Propell, who says this resolution is usually passed after the Annual General Meeting, where the budget would have been approved and this is applied to the participation quota or the rule that determines the way the levies are billed.
The participation quota of a section is worked out by dividing the floor area of the section by the total floor area of the sections in the scheme and this is the fairest way of working out the amount each owner pays, he says. Apart from the levy amounts this participation quota also establishes the value of the owner’s vote and the size of the owner’s undivided share in the common property.
The exclusive use areas allocated in the scheme do not have participation quotas attached to them but the owner who has the usage right does, however, have to cover all costs attributable to those areas.
Once the scheme has been established, says le Roux, it is not likely that the participation quotas will change, because the consent of all the owners negatively affected must first be obtained.
The trustees of the scheme can decide whether the levies need to be paid in one lump sum, but they usually make it easier on the owners, by splitting the payments into monthly instalments due on the first day of every month.
Once the levies have been established and a resolution passed to this effect, the owners then become legally obligated to pay them. This is usually the sectional title scheme’s only source of income and if there is another source of income these usually come with tax implications whereas the levies are not taxable.
If at the end of the financial year, there is a profit for some reason or another, says le Roux, this is usually put into a reserve fund as owners are not entitled to any refunds. The levy funds are not seen as being of a capital nature, so they cannot be redistributed to the owners of the scheme. If this provision was not in the rules of the scheme, he says, the Receiver of Revenue would not see the levy payments as tax exempt.
“The most important aspect of financial stability in any sectional title scheme is ensuring that the monthly cash flow is positive and that the levy collection process is efficient. Whether this is done by a managing agent or the trustees themselves, the principles are the same, regular payment is what is needed and those who do not pay their levies are putting their scheme at risk,” he says.