The Introduction of The Strata Schemes Management Act 2015 (The New Act) has generated significant interest within the NSW Strata Sector and other States currently undergoing strata reform. Most of the media coverage has centred upon issues such as smoking, parking, pets and the pros and cons in relation to the termination of schemes. However, Peter Dawkins, Senior Client Director of Kelly + Partners describes mandatory audit as one of the real “sleeper” issues that lies within the new Act and Regulations. “Usually the discussion of anything remotely concerned with audit will put many people to sleep but more seriously, I would have to describe this one as a real “sleeper issue” due to the fact that it’s flown completely under the radar”. The new mandatory audit provisions, determined by Section 95 of The New Act, give a specific set of guidelines for the calculation of annual budgets specifically for the determination of an audit .
It is clear that this will have a direct, significant and immediate impact on the NSW Strata Sector. Mandatory audit under “The Old Act” Currently, under Section 107 of the Strata Schemes Management Act 1996 (“The Old Act”) the Owners Corporation of a large strata scheme must ensure that the accounts and financial statements of the owner’s corporation are audited before presentation to the annual general meeting. The definition of a large scheme as determined by the Old Act is a scheme with 100 lots or more. Section 95 and “The New Act” Section 95 of the New Act pertains to the auditing of accounts and financial statements. 95(1) introduces a second test for which a strata plan may be subject to mandatory audit. In addition to large schemes as specified in the old act, mandatory audits also apply to “a strata scheme for which the annual budget exceeds $250,000”.
Prior to the release of the Regulations the only guidance in relation to how this “annual budget” was determined was Section 95(4). Section 95(4) states that: The regulations may specify the manner in which the annual budget of a strata scheme is to be determined for the purposes of this section. The release of Strata Schemes Management Regulation 2016 (The Regulations ) in late August 2016, has provided specific guidance in relation to the calculation of annual budgets for the purposes of section 95(4). The “annual budget” as defined in Regulation 21 for these specific purposes is broad and all-inclusive and is outlined below: Regulation 21 – Calculation of annual budget (for mandatory audit). For the purposes of Section 95(4) of the Act, the amount of the annual budget is to be the sum of the following:
the amount of contributions levied for the year concerned (whether or not they have been paid),
any income of the owners corporation from any other source,
other amounts held by the owners corporation for the purposes of the owners corporation.
In relation to the above regulation and based upon legal advice received, the calculation to be made as to whether a strata plan exceeds the mandatory audit threshold of $250k is:
Budgeted Levies (including special levies) PLUS Any Other Income (e.g. interest received, rental income, insurance receipts, legal settlements, disposals of common property) PLUS Opening Balance Cash held (including Cash at Bank and Investments)
New mandatory audit provision is immediately applicable The timing of the new provision and its application to mandatory audits appears to be effective immediately with no specific transitional arrangements. The practical effect of this, based on our understanding, is that strata managers and owners will be required to make this calculation in the current year. It appears sufficiently clear that the relevant annual budget is the current annual budget i.e. the annual budget last adopted. In relation to the commencement and application of the Act including Section 95 of the Act it is our understanding that the key date is the date of the AGM i.e. accounts presented to an AGM occurring on or after 30 November 2016 [where the $250k threshold is exceeded] must be audited. Based on the above, it would therefore stand that the application of this new mandatory audit provision applies to current year annual budgets (not next year’s budget) and that these annual budget calculations are applicable to all strata plans with AGM dates on or after 30 November 2016.
PRACTICAL SCENARIOS OF MANDATORY AUDIT CALCULATION UNDER SECTION 95 OF THE ACT AND REGULATION 21.
Scenario 1. Mandatory audit provisions triggered at the commencement of the financial year. Strata Plan ABC has a year end 31 October 2016 and has an AGM date scheduled for 30 November 2016. At the commencement of the Strata Plan’s financial year, 1 November 2015 there was $100K in Cash at Bank and $50K Investments held. Budgeted levies for the year ended 31 October 2016 is $110K.
Scenario 2. Mandatory audit provisions triggered during the financial year. Strata Plan XYZ has a year end 30 June 2016 but delayed its AGM until 1 December 2016. At the commencement of the Strata Plan’s financial year 1 July 2015 there was $30K in cash and NIL Investments held. Budgeted levies for the year ended 30 June 2016 is $50K and budgeted Tower rental income for the year is $50K. As this would have only totalled $130K at the commencement of the year the strata plan would have fallen below the mandatory threshold. However, during the year Strata Plan XYZ also raised a special levy totalling $20K and received a Legal Settlement totalling $200K bringing the annual budget for audit determination purposes to $370K, well above the statutory $250K.
Practical application of Section 95 and Regulation 21 – Mandatory audit threshold The purpose of the above two scenarios is to illustrate that the calculation applicable to the mandatory audit threshold can be made at the commencement of the financial year &/or during the financial year. The above scenarios also serve to illustrate that the key date applicable in the Act is the date of the AGM. Where the AGM for the current year occurs on or after 30 November 2016 these provisions apply. It would be reasonable to assume that the majority of strata plans which will fall within the mandatory audit provisions as calculated under Regulation 21 would likely be able to be identified at the commencement of the financial year based on opening cash balances held (including investments) and budgeted income (including levies and other income).
However, because of the provision in Regulation 21 (b) “any other income of the owner’s corporation from any other source”, the mandatory threshold may be exceeded by any other income received throughout the financial year, budgeted or unbudgeted Strata Managers and Strata Committees may not have been previously alerted to this substantive change to the legislative requirements pertaining to mandatory audit but with the rapid approach of the 30 November 2016 deadline it is extremely important that all stakeholders are aware of the new provisions and their immediate impact.
The new requirements are complex and compliance will be difficult for schemes without the support of an experienced accountant. Should you have any queries in relation to the new mandatory audit requirements and how they may impact you please do not hesitate to contact : Peter Dawkins or Joel Russell at Kelly+Partners Chartered Accountants.