Compulsory funds for retirement villages
The operator of a retirement village must establish 3 compulsory funds:
- a capital replacement fund for replacing the village's capital items
- a maintenance reserve fund for maintaining and repairing the village's capital items
- a general services charges fund for the cost of services that are supplied or made available to all residents of a retirement village.
Capital replacement fund
A capital replacement fund is used to:
- replace the village's capital items
- pay quantity surveying fees (for reports prepared on the fund)
- pay the tax liability on this fund.
It is an offence to use money in the fund for any other purpose, including crediting other funds.
You cannot use the fund for capital improvement or to replace body corporate property.
The operator is solely responsible for contributing to the fund.
You must open a separate bank account for the purpose of holding amounts standing to the credit of the capital replacement fund. The account must require your signature for any withdrawals.
The account name should include your name and the retirement village's name followed by the words 'secured capital replacement fund account'.
Once you establish the fund, a statutory charge is automatically created over it.
The purpose of the charge is to ensure that the fund is protected and available for use. It has priority over any other charge related to the fund.
The statutory charge continues until the village no longer operates and all former residents receive their exit entitlements.
Each year you must obtain an independent quantity surveyor’s written report about the expected capital replacement costs for the village for the next 10 years.
Using the recommendations from the quantity surveyors report, and having regard to the purpose of the capital replacement fund, you must decide the capital replacement reserve. The capital replacement reserve is the minimum amount to remain in the capital replacement fund each year to accumulate funds for future spending for the village.
The amount held in the capital replacement fund should reflect the amount you and the quantity surveyor anticipate is required to be spent during the current financial year, plus amounts reserved to be accumulated to meet anticipated major expenditure over at least the next 9 years.
You must use your best endeavours to implement the surveyor’s recommendations.
A full quantity surveyor report must be obtained every 3 years and an updated report every financial year in which a full report is not required. For more details about the capital replacement reserve, read section 92 of the Retirement Villages Act 1999.
A budget for the capital replacement fund must be prepared each financial year and must be in the approved form (if one exists).
The budget must allow for raising enough funds to provide for necessary and reasonable spending from the capital replacement fund for the current year and also reserve an appropriate proportional share of amounts that need to be accumulated to meet anticipated major expenditure over at least the next 9 years after the financial year (the capital replacement reserve).
The budget must fix the amount to be raised by way of capital replacement fund contribution to cover these amounts.
The recommendations of the quantity surveyor should be considered when you decide the amount of the capital replacement fund contribution and capital replacement reserve.
The residents' committee may request a copy of this budget in writing at least 28 days before the financial year begins. If requested, you are required to give the residents' committee a copy of the budget at least 14 days before the financial year begins.
In addition to preparing the budget, you must ensure the account balance of the capital replacement fund is more than the reserve. At the end of each financial year, the balance of funds remaining in the capital replacement fund should reflect the quantity surveyor recommendations for the accumulation of funds for future spending.
The amount deposited into the capital replacement fund each year should not be equal to the amount of expenditure for that year.
If the amount you must spend on capital replacement exceeds the amount in the capital replacement fund, you must pay the difference.
The following payments must be paid into the capital replacement fund:
- amounts received under insurance policies for the destruction of items of a capital nature
- interest from investment of amounts held in the fund
- the capital replacement fund contribution
- any amount required to be paid by a resident due to deliberate damage or accelerated wear and tear under the Act
- the amount any existing residence contract (commenced prior to 1 July 2000) requires to be paid from a resident's services charge towards capital replacement.
You must not invest amounts held in the capital replacement fund other than in an authorised investment under the Trusts Act 1973.
Maintenance reserve fund
The maintenance reserve fund is used to:
- maintain and repair the village's capital items
- pay quantity surveying fees (for reports prepared for this account)
- pay the tax liability on this fund.
Residents are solely responsible for contributing to the fund.
You cannot use the fund for day-to-day maintenance of the village, capital improvement or replacement, or body corporate property.
To set up the maintenance reserve fund, open a trust account that needs your signature for any withdrawals. If your retirement village has more than 1 operator, all operators will need to be signatories on the account.
Regardless of any change in operator, the fund holds all money in trust until the village no longer operates and all former residents receive their exit entitlements.
The reserve is the minimum amount that must be available in the maintenance reserve fund.
To calculate the reserve, obtain a report from an independent quantity surveyor that details the village's expected maintenance and repair costs for the next 10 years.
The quantity surveyor report must be obtained every 3 years.
A budget for the maintenance reserve fund must be prepared each financial year. The budget must include enough funds for necessary and reasonable spending and for future expenses.
You will need to carry forward the surplus or deficit at the end of the year and account for the amount when preparing the following year's budget.
The residents' committee may request a copy of this budget. This must be requested in writing at least 28 days before the financial year begins. If requested, give the residents' committee a copy of the budget at least 14 days before the financial year begins.
In addition to preparing the budget, you also need to ensure that the account balance of the maintenance reserve fund is more than the reserve. If the amount in the fund is less than the reserve, you need to increase the residents' fund contribution.
If you must spend more than the amount in the fund, you must pay the difference. This is recorded as an interest-free loan from the operator to the fund.
You must make the following payments into the maintenance reserve fund:
- the residents' contribution
- interest collected from this fund – the Trusts Act 1973 provides direction on how to invest this money.
General services charges fund
You must establish and keep a fund for general services.
These charges pay for services you supply to all village residents, for example:
- management and administration
- gardening and general maintenance
- recreation or entertainment facilities
- other services specified in the contract.
You must prepare a budget each financial year to plan for these costs and monitor actual spending against the budget. The budget must be in the approved form if one exists.
You must carry forward any surplus or deficit at the end of the financial year, and account for the amount when preparing the following year's budget.
If the residents' committee requires a copy of the draft general services charge budget for the financial year:
- they have to request it in writing at least 28 days before the financial year begins
- you have to supply the budget to them at least 14 days before the financial year begins.
- look for cost-effective alternatives before increasing any charge
- not increase the general services charge by more than the Customer Price Index increase unless the village residents approve the extra increase by special resolution vote
- provide a document that explains the expenditure involved in providing each general service and any variation from the amount originally budgeted to the residents' committee if they request it.
- rates, taxes or charges on the village
- a village employee's salary (if the law demands an increase)
- insurance premiums or excesses.
- get at least 2 quotes for supplying the service from qualified trades people unless there are exceptional reasons that make this impractical
- give the residents' committee copies of the quotes and pay the costs of getting the quotes
- not charge residents for the new service before it is supplied.