replacement and recurrent charges · Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to

What’s capital maintenance,

replacement and recurrent

chargesLASA National PD Program for Aged Care Leaders in NSW

21 March 2018

1

Overview of presentation

• Structure of Act

• Items of capital

• Capital maintenance/replacement

• Village contracts

• Financial management Part 7

• Recurrent charges

2

Structure of Act

• Part 1 – Definitions

• Part 2 – Application of Act

• Part 3 – Representations and information about retirement villages

• Part 4 – Entry into villages

• Part 5 – Village contracts

• Part 6 – General management of village

• Part 7 – Financial management of village

• Part 8 – Disputes.

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Structure of Act

• Part 9 – Termination of contract

• Part 10 – Vacation of premises

• Part 10A – Protection of ingoing contributions other than registered

interest holder

• Part 11 – Enforcement

• Part 12 – Administration

• Part 12A – Powers of investigation

• Part 13 – Miscellaneous

• Schedule 1 – Consent of residents

4

Items of capital

Capital Works

• Operator is responsible to maintain and replace all items of capital

EXCEPT:

• items owned by residents

• common property under strata scheme, association property (s 92)

• Prohibits buying/selling items to residents (s101)

• Raises issue of budgeting for strata village.

5

6

Items of capital

• Act – definition – section 4

• (a) any building or structure in a retirement village, and

• (b) any plant, machinery or equipment used in the operation of the

village, and

• (c) any part of the infrastructure of the village, and

• (d) any other item prescribed by the regulations,

• but does not include any item excluded from this definition by the

regulations.

Items of capital

Under the Regulations (Reg 5):

• Item of capital – defined categories with examples:

• fixtures – eg bench tops, hot water systems, stoves

• fittings – eg light fittings, taps, sanitary fittings

• furnishings – eg curtains, blinds

• non fixed items – eg whitegoods, portable air conditioners, fans, table and

chairs

• Examples do not always match legal/tax definitions.

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Capital maintenance/replacement

Under the Act definition:

• Maintenance – work carried out to repair and maintain an ‘item of

capital’, including work prescribed (or not) by regulations

• Replacement – replacing ‘item of capital’ but not capital maintenance

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Capital maintenance cont.

Regulations

• Section 4 - Capital maintenance IS NOT:

• work to substantially improve an item of capital beyond original

condition

• work done to maintain an item of capital where it would have been

‘more cost effective to replace’.

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Capital maintenance cont.

• Cases on point:

• Alloura Waters Retirement Village Residents Committee v Living Choice

Australia Pty Ltd [2014] NSWCATCD 68

• Sakkara Investment Holdings Pty Ltd ATF Sakkara Landings v Residents

Committee, the Landings [2015] NSWCAT

• Tax Ruling TR 97/23

10

Part 5 - Village contracts (ss 24-44E) cont.

• Condition reports – important to set benchmark of items of capital

• must be provided to non registered interest holders

• Reg 14 sets out timing of who and when inspection and form of report done

• must be done 14 days before contract and annexed to contract Form

provided in Regs at Part 2, Schedule 1.

11

Part 5 - Village contracts (ss 24-44E) cont.

Renovations and alterations (s 41A)

• Act amended to allow residents to alter and renovate premises with

operator consent

• Consent condition can include obligation to remove and make good

(could also include obligation that they remain) eg. solar, hot water

• Resident can challenge terms of conditions and seek ruling from

Tribunal.

12

Part 7 - Financial management of village (ss 92-

120C)

• Divided into following parts:

• Division 1: preliminary

• Division 2: capital maintenance and replacement

• (Note: there is no Division 3)

• Division 4: recurrent charges

• Division 5: annual budgets

• Division 6: annual accounts

• Division 7: surpluses and deficits.

13

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Recurrent Charges

• Recurrent charges definition includes ‘rent’

• Application of recurrent charges form basis of proposed budget – s112

• Allowable recurrent charges – depends on terms of village contract.

• Not allowed to spend recurrent charges:

• On matters not in village contract

• Reg 26;

• (a) fees for membership of industrial or professional associations,

• (b) overseas travel by the operator of the retirement village or the operator’s agent or employees,

• (c) any costs associated with marketing vacant units within a retirement village, including such

costs that may have been included in wages or salaries,

• (d) payroll tax, unless:

• (i) the wages paid by the operator in respect of operating the retirement village to which the recurrent charges

relate (including any wages apportioned to the retirement village by the operator’s head office) are more than

the threshold amount within the meaning of Schedule 1 to the Payroll Tax Act 2007, or

• (ii) before 1 March 2010, the residents of the retirement village consented to the financing of payroll tax by way

of recurrent charges and that consent has not been revoked,

• (e) land tax,

• (f) gifts or donations,

https://www.legislation.nsw.gov.au/#/view/act/2007/21

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Recurrent Charges

• (g) costs associated with the operator’s head office or management or administration fees unless the

costs or fees are associated with providing services to residents of the retirement village and are

included in the annual budget in accordance with clause 19 (2),

• (h) more than 50% of any increase, from the previous year, in the experience premium component of

the insurance premium payable by the operator for insurance that the operator is required to obtain

and maintain under the Workers Compensation Act 1987,

• (i) if the retirement village is subject to a strata scheme:

• (i) the carrying out of any works or maintenance that is required to be carried out by the owners corporation under

the strata scheme (unless the operator is engaged by the owners corporation to carry out the work), or

• (ii) levies and other contributions payable by the operator of the retirement village under the Strata Schemes

Management Act 2015 in respect of that strata scheme (other than levies payable in respect of premises occupied by

a resident of the retirement village),

• (j) if the retirement village is subject to a community land scheme:

• (i) the carrying out of any works or maintenance that is required to be carried out by the relevant community

association, neighbourhood association or precinct association under the community land scheme (unless the

operator is engaged by the association to carry out the work), or

• (ii) levies and other contributions payable by the operator of the retirement village under the Community Land

Management Act 1989 in respect of that community scheme (other than levies payable in respect of premises

occupied by a resident of the retirement village).





120C) cont.

Capital Works

• Operator must maintain items of capital they are responsible for given:

• age

• prospective life

• money paid by residents

• Resident to inform operator of need for maintenance but may

undertake urgent maintenance, which is defined (must be reimbursed

by operator) (s 92)

• Resident responsible for damage to operator’s items.

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120C) cont.

Capital Works

• Resident can seek orders from Tribunal for cap

maintenance/replacement to be done.

• Funding of capital maintenance from:

• capital works fund

• recurrent charges.

• Operator must fund all capital replacement.

• Works NOT to be funded:

• new building/stage of village

• statutory home warranty

• depreciation of capital items

• refurbishment of vacant premises.

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120C) cont.

Capital Works

• Costs form part of annual budget – IF operator obliged to provide such

budgets.

• Budget must include:

• each item of capital maintenance to be done and its expected cost

• any quotes

• provision for urgent maintenance.

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120C) cont.

Capital Works

• Capital works fund

• IF approved budget provides for setting aside recurrent charges for capital

maintenance for period BEYOND the end of financial year

• operator MUST establish capital works fund

• must be established with ‘authorised deposit taking institution’.

19

Part 7 - Financial management of village – ss 92 –

120C cont.

Capital Works

• Must pay INTO fund (s 99(4)):

• proportion of recurrent charges

• interest received from ‘investment’ of fund

• May only pay OUT OF fund (99(5), (6) (7)):

• meet capital maintenance costs; or

• if residents consent to proposal to pay out funds not required for work – to

residents in ‘equal shares’ – operator can object.

20


120C) cont.

Capital Works Fund

• If operator is property trust or other corporation made under an Act (eg.

church) capital works fund can be held in any fund administered by that

company (Reg 30(1))

• Operator can use Capital Works Fund for other purpose BUT NOT new

building etc unless residents consent to use by special resolution (Reg

30(2)).

21


120C) cont.

Recurrent charges (ss 103-111)

• Points:

• Non fixed formula – only one variation per year

• IF non fixed AND increase NOT > CPI between CPI of last

variation and CPI at time of notice THEN operator only needs

to give 14 DAYS notice of change.

• IF non fixed AND increase IS > change in CPI between CPI of

last variation and CPI at time of notice THEN operator follows

consent process:

• 60 days notice following previous

• brief explanation of reasons

• details of action to minimise.

22


120C) cont.

Budgets and annual accounts

• Consent to proposed budget not necessary IF

• no variation to recurrent charges

• fixed formula recurrent charges

• formula for increase non fixed, not > CPI.

• Contingencies

• Section 105A allows for contingencies in budget

• Reg 21 limits contingencies to $1.

• Variations to budgets (s 116)

• Allowed if no change in services or total expenditure.

23


120C) cont.


• Notice of annual budgets

• Regulations main source of control

• Matter dealt with in budget (Reg 19)

• Reg 19(1) - allocation of costs

• Reg 19(2) - need info re: head office costs.

• Form of budget – removed as from 1 September 2017.

24


120C) cont.


• Notice accompanying annual budgets (Reg 20)

• Allows minor variations and changes in line items

• If non fixed > CPI, further information required

• If fixed, no change, or < CPI, more info.

25


120C) cont.


• Audited accounts

• Accounts must be audited – s 118(1)

• Fees can form part of approved budget

• Must audit capital works fund –119 (2)

• If no resident committee – display accounts

• Opt out for villages < $50,000 recurrent charges.

• Quarterly accounts must be provided within 28 days – s118(3), don’t

need to be audited

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120C) cont.


• Deficits (ss 120A – 120C)

• Deficit means deficit after 23 November 2006

• Surplus carried over – residents can ask for it to:

• be spent; or

• handed back ‘in equal shares’.

• Operator can make application as to ‘equal shares’

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Thank you

Arthur Koumoukelis

M: 0419791197

Dentons Australia

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replacement and recurrent charges · Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to

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