Why Under-Budgeting Now Will Cost You Later

By Jennifer Paddock

As we lead up to the end of September, the end of the financial year for many sectional title schemes, the trustees annual budgeting cycle may well be underway.

A common, and concerning, approach that some sectional title trustees take during this time is instead of creating realistic budgets that properly fund the body corporate’s operating expenses and reserve costs, they present pared-down budgets with only minimal levy increases. Their thinking is that when additional expenses arise outside of the budgets, they will simply raise a special levy.

At first glance this might seem like a good way to keep levies low and owners happy in the short term. But legally, financially, and practically, it’s a very risky strategy that can land both the body corporate members and the trustees in hot water.

The Legal Requirements for Budgets

Under the Sectional Titles Schemes Management Act, 2011 (STSM Act), the body corporate has two core annual budgeting obligations:

1. Section 3(1)(a): to establish and maintain an administrative fund “reasonably sufficient to cover the estimated annual operating costs.”; and
2. Section 3(1)(b): to establish and maintain a reserve fund “reasonably sufficient to cover the cost of future maintenance and repair of common property, but not less than such amounts as may be prescribed by the Minister.”

The Minister has prescribed the minimum reserve fund contributions in Regulation 2 made under the STSM Act, which must be calculated based on the amount of money in the reserve fund at the end of the previous financial year compared to the total contributions to the administrative fund for that previous financial year.

Put simply, trustees are legally obliged to prepare reasonably sufficient budgets for both its admin and reserve funds. An “under-budgeted” admin or reserve fund budget does not meet this required legal standard.

Special Levies are for the Unexpected

Trustees often argue that they can make up any shortfall with a special levy. But this is not what the law intends.

PMR 21(3)(a), made under the Regulations to the STSM Act, makes it clear that special levies may only be raised by the trustees if:

“additional income is required to meet a necessary expense that cannot reasonably be delayed until provided for in the budget for the next financial year.”

Routine, predictable expenses, such as planned maintenance, insurance premiums, management fees, and so on, must be budgeted for, realistically, annually. Special levies are intended for unforeseen or exceptional circumstances, not as a substitute for realistic budgeting.

Trustee Liability for Under-Budgeting

If trustees intentionally and knowingly present inadequate budgets for adoption, they are not only in breach of section 3(1)(a) and (b) of the STSM Act but they may also be in breach of their fiduciary duties under section 8 of the STSM Act, which requires trustees to act honestly, in good faith, and with due care and skill.

This could expose trustees to personal liability if their decisions cause financial prejudice to the body corporate.

What Should Members do if Trustees Present Inadequate Budgets?

• Members should insist that the body corporate’s admin and reserve fund budgets, and the associated levy schedules that follow, are adjusted to ensure they are “reasonably sufficient” in compliance with section 3(1) of the STSM Act, and that the reserve fund budget complies with Regulation 3’s minimum contribution amount relevant to the scheme.
• If trustees present inadequate budgets at the AGM, members should vote against adopting them.
• If an inadequate budgets and levy schedules are nonetheless approved, any owner may apply to the Community Schemes Ombud Service (CSOS) under section 39(1)(c) of the Community Schemes Ombud Service Act, 2011 for an order declaring the contribution “incorrectly determined or unreasonable,” and requiring adjustment to a reasonable amount.

Conclusion 

Keeping levies artificially low by under-budgeting and relying on special levies is short-sighted and unlawful. Trustees have a legal duty to prepare budgets that are “reasonably sufficient” and the reserve fund budget must comply with Regulation 3’s minimum contribution amount.  Members should hold trustees accountable to these required standards. In the long run, proper budgeting protects owners from the shock of unexpected special levies, ensures the scheme can meet its financial obligations, and keeps trustees out of legal jeopardy.

_________________________________

Article reference: Paddocks Press: Volume , Issue

This article is published under the Creative Commons Attribution license.

Back to Paddocks Press – September 2025