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Divide and conquer


Within the next 25 years, strata titled properties will outweigh stand-alone residences, according to the Australian Bureau of Statistics. That means most property owners in Australia will belong to a Body Corporate.

If you own an apartment or townhome, or plan to invest in these types of properties in the future, it’s important to understand the roles and responsibilities of a Body Corporate. In this issue of Property Insight, we get back to basics and discuss this often misunderstood aspect of property ownership.

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What is a Body Corporate?

A Body Corporate is a legal entity, which may also be known as an owner’s corporation. When a parcel of land is subdivided into apartments or townhomes, a Body Corporate will be formed by the owners of the land, usually the Developer.

If you own a lot in a Community Title Scheme in Australia, such as an apartment or townhome, then you are a Body Corporate member. The purpose of the Body Corporate is to manage and maintain the common areas used by all residents including entries, hallways, lifts and pools. The Body Corporate is responsible not only for the property structures, but also the liveability of the development. This may include noise-management, parking and any behavioural factors that impact the residents of strata titled properties.

It’s important to note that strata regulations vary across each state and territory in Australia. In Queensland, the main legislation is the Body Corporate and Community Management Act 1997. Throughout this article, we have used Queensland law as a guide; it’s important to examine your state’s regulations for further details.


How is the Body Corporate managed?

A Body Corporate must have a committee, which is usually elected at the Annual General Meeting. The role of the committee is to handle the day-to-day administration of the Body Corporate, and to make and implement decisions pertaining to its responsibilities.

All lot-owners receive notifications of committee meetings along with an agenda, unless they have advised otherwise. As an owner, you can actively participate at committee meetings. You have the right to submit motions to the committee (to suggest a maintenance solution, for example), which must be included on the agenda of the next meeting or at the next suitable opportunity.


How is the Body Corporate funded?

By you, the owner of strata titled property! That’s why it’s important to understand how Body Corporate works. Every owner pays quarterly contributions to the Body Corporate and this rate is generally agreed upon at the Annual General Meeting.

How are my contributions allocated?

There are two funds managed by the Body Corporate:

  1. Administration fund: Used for the ongoing maintenance of all common areas. Cleaning and insurance are examples of items paid for with the administration fund.
  2. Sinking fund: Assigned for future capital expenses such as painting, roof repairs, lift maintenance and any major improvements.

New properties versus old

It is important to note that, depending on the value of the sinking fund, your contributions may increase if major capital works are needed. Many projects will fall into this category – replacing an apartment block’s roof, for example (which is not as uncommon for older buildings as you might think).

In terms of investment, a brand-new strata titled property will generally have less capital expenditure required. Brand-new apartments tend to require less maintenance, minimising your investment risk. Remember, the higher the capital expenditure required, the higher the Body Corporate fees will be.


Pay the price for recreational facilities

Generally speaking, developments with recreational areas incur higher Body Corporate fees. The basic rule is this: the larger or more varied the recreational facilities, the higher the contribution.

Recreational facilities are common areas, therefore the responsibility of the Body Corporate, which must ensure satisfactory maintenance and pay for any work that may be required in the future.

A knee-jerk reaction might be to avoid developments with these facilities, but keep in mind that recreational facilities (pools, BBQ areas and gyms) are highly desirable and tend to attract quality tenants. In addition to this, the more liveable the property, the fewer vacancy periods you will experience.

In other words, although you might have to pay higher body-corporate fees, the property may provide higher rental returns that make it worthwhile. And, of course, a highly-desirable property is much easier to sell.


Depreciation and tax benefits

As a strata property owner, you are also entitled to claim depreciation on all common areas, including the recreational facilities. Common property entitlements can potentially add thousands of dollars to your annual tax deduction. The larger the development and the more extensive the recreational areas, the greater the depreciations benefits.

Keep in mind too, for an investment property, body corporate fees are an expense which you may be able to claim a tax deduction. All this should be taken into consideration when weighing up a property’s potential.


Insurance: Who covers what?

Let’s spend a moment looking at the parameters of insurance under the Body Corporate, as this is an area prone to confusion.

The Body Corporate is obligated to hold public-liability and building insurance for all common areas. This may extend to some areas of your lot, but not all. For example, if a storm causes water damage to the internal walls and ceiling of your apartment, it is the Body Corporate’s insurance that is likely to be liable. Damage to items such as carpet or furniture would be covered by your insurance policy.

As a lot owner, you are responsible for insurance within your property, however you may be surprised by which areas are also covered by the Body Corporate’s insurance, so it’s worth getting to know the details of that policy.


Strata versus stand-alone

There is an ongoing debate about whether you’re better off buying strata titled properties like apartments and townhomes, or stand- alone residences. Obviously, a stand-alone property means no Body Corporate fees and more freedom to make decisions. But that doesn’t mean a freestanding house won’t incur maintenance expenses, some of which can be unexpected or urgent. And you may have to organise the repairs yourself.

In this respect, Body Corporate contributions, particularly the sinking fund portion, could be thought of as a savings plan, to ensure funds are ready when needed. That said, beware older complexes that may be in need of extensive maintenance or repairs and look closely at the balance of the funds.

If the Body Corporate is managed well, strata titled properties should have manageable maintenance costs comparable to those of a stand-alone house. Ultimately, there are benefits to both house and apartment ownership. The decision will come back to your preferences and financial goals. However, Body Corporate fees shouldn’t be an automatic deterrent when choosing a property. A number of factors should as always form the basis of a smart investment decision, including your individual goals and financial position.


Final thoughts

As you can see, Body Corporate isn’t as threatening as one might initially think. Contributing to two separate funds, Body Corporate fees keep a property looking its absolute best. And if a property is well taken care of it will be more appealing to both tenants and purchasers.

Finally, remember that as a strata titled owner you are entitled to be involved in Body Corporate committee meetings and have your voice heard.


For further information on Queensland’s Body Corporate legislation visit: http://www.justice.qld.gov.au/justice-services/body-corporate-and-community-management


 

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent of Which Property and the Author.

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