Sectional Titles Schemes Management Act CSOS Levies

On 7 October 2016 the Sectional Titles Schemes Management Act, No 8 of 2011 and the Sectional Titles Schemes Management Regulations, 2016, became effective. Together with the Act and Regulations, the Community Schemes Ombud Service Act, 2011, and the Regulations also became effective.
 
There has been confusion in practice with regard to which entities the two different Acts and their Regulations should apply.
 
The Sectional Titles Schemes Management Act and its Regulations are only applicable to body corporates as per the definitions in the Act. However, the Community Schemes Ombud Service Act, 2011, and its Regulations include sectional title development schemes, share block companies, home or property owners associations and housing schemes for retired persons.
 
It is therefore important to realize that it is necessary to assess the implications of the two newly- published Acts and Regulations separately.
 
A summary of how entities are affected by the new legislation covered in this article, is listed in the table below:
 
  Sectional Title Schemes (Body Corporates) Share block companies Home- and property owners associations Housing schemes for retired persons
Repairs and maintenance reserve fund Yes No No No
More comprehensive insurance Yes No No No
Trustees reports Yes No No No
Annual general meetings Yes No No No
Compulsory audit of financial statements Yes No No No
Annual returns Yes Yes Yes Yes
CSOS levies Yes Yes Yes Yes
Fidelity insurance Yes Yes Yes Yes
 
Sectional Titles Schemes Management Act and Its Regulations
 
The implementation of the Sectional Titles Schemes Management Act and its Regulations has quite big implications for body corporates with regard to:
      
  1. a reserve fund which needs to be maintained,
  2. additional insurance requirements,
  3. more detailed trustee reports,
  4. additional requirements with regards to the annual general meeting; and
  5. audit requirements
Repairs and Maintenance Reserve Fund
 
A body corporate is now required to establish a reserve fund to cover the cost of future maintenance and the repair of common property. Separate books of account, as well as separate bank accounts, should be maintained for the administrative and reserve funds of the body corporate.  
 
A minimum amount should be contributed to this reserve fund on an annual basis. This minimum amount is depending on what the balance of the reserve fund was at the end of the previous financial year.
 
  Reserve fund balance at the end of the previous financial year Budgeted contribution to reserve fund in the current year
1. Less than 25% of total contributions to administrative fund At least 15% of the total budgeted contribution to the administrative fund
2. Equal to or greater than 100% of total contributions to administrative fund No minimum contribution required
3. Between 25% - 100%  of total contributions to administrative fund At least the amount budgeted for repairs and maintenance to common property in the administrative fund budget for the year
 
Since this is a new requirement in terms of the Regulations, most body corporates will not currently have such a reserve fund. It was, however, confirmed by The Community Schemes Ombud Service that the requirement to keep and maintain a reserve fund will commence from the ensuing financial year after the proclamation of the Act and Regulations. The budget to be tabled at the annual general meeting that falls immediately after 7 October 2016 must, therefore, include provision for the contribution towards the reserve fund.
 
Insurance
 
Previously, body corporates only insured the buildings for replacement value. It is now required that they also obtain public liability insurance of not less than R10 million, as well as insurance against the risk of loss of funds sustained as a result of fraud or dishonesty.
 
Trustee Reports
 
The responsibilities of the trustees are also emphasized under the new Regulations. Trustees are now required to report on their activities and duties, as well as the extent to which the approved maintenance, repair and replacement plan has been implemented.
 
The body corporate should prepare a report adopted by the trustees to be presented at the annual general meeting, reviewing the affairs of the body corporate during the financial year.
 
Annual General Meetings (AGM)
 
All AGMs should now be held within four months of the end of its financial year.  At the AGM, the budgets for the administrative and reserve funds for the next financial year should be approved.
An auditor should also be appointed to audit the annual financial statements. Under the previous Act, body corporates with less than 10 units needed to appoint an accounting officer to prepare the annual financial statements of the body corporate. However, under the new Regulations, all body corporates’ annual financial statements need to be audited unless all the sections in the scheme are registered in the name of one person.
 
Compulsory Audit of Body Corporates
 
The Regulations not only have implications for body corporates and trustees, but also for auditors of body corporates. The Regulations now contain more stringent requirements on auditors with specific reference to the independence of the individual registered auditor.
 
The audit must now be carried out by an independent auditor, who has not participated in the preparation of the annual financial statements or advised on any aspect of the accounts of the body corporate during the period being reported on.
 
The Independent Regulatory Board for Auditors has, however, confirmed that the compiler of the financial statements of a body corporate and the auditor of those financial statements can be two qualifying professionals from the same firm.
 
Although the Act and Regulations are intended to regulate the effective management of body corporates with regards to maintenance, levies and insurance, only time will tell what the financial implications of these new requirements will be on body corporates and ultimately on the owners of sectional title schemes.
 
Sectional Title Development Schemes, Share Block Companies, Home Or Property Owners Associations and Housing Schemes For Retired Persons.
 
The Community Schemes Ombud Service Act, 2011, and the Regulations is not only applicable to sectional title development schemes (body corporates), but all community schemes.

In terms of the Act, all community schemes should:

   
  1. Submit an annual return within four months after the financial year end. Other documents, including a schedule of levies payable and audited financial statements where the scheme is required to be audited, must accompany the annual return.
  2. Pay on a quarterly basis, the prescribed levies to the Community Schemes Ombud Service.
  3. Take out fidelity insurance.
Levies
 
The levy to be collected on a monthly basis is currently calculated according to the following formula: The lesser of R40 or 2% of the amount by which the monthly levy charged by the scheme exceeds R500. Community schemes with levies less than R500 per unit are therefore exempt from paying levies.
Illustrative values of the monthly prescribed levy:
 
Monthly levy charged by the community scheme Monthly CSOS levy payable
Zero to R 500 R nil
R 600 R 2
R 700 R 4
R 800 R 6
R 1 000 R 10
R 1 500 R 20
R 2 000 R 30
Above R 2 500 Capped to R 40
 
Since the payment of levies became effective 90 days from date of publication of the Regulations, these levies should be collected by the schemes from 5 January 2017.
 
Payment of the collected levies should be made to the Community Schemes Ombud Services by the schemes on a quarterly basis, starting the quarter ending on 31 March 2017. Levies should be paid over not later than five days after the end of the quarter.
 
Fidelity Insurance
 
The minimum amount of fidelity insurance to be obtained is the total value of the community scheme's investments and reserves at the end of the last financial year, plus 25% of the current year’s operational budget.
 
With the implementation of the new Acts and Regulations, all trustees, directors, managing agents and auditors of community schemes will have to ensure that they are well informed of the implications of the new requirements under these Acts and Regulations for each community scheme with which they are involved.