Previously, only Sectional Title Schemes with ten or more units were required to have their annual financial statements audited. However, the new rules and regulations now require that all Sectional Title Schemes annual financial statements be audited (unless all the sections in a Sectional Title Scheme are registered in the name of one person).
On 7 October 2016 the Sectional Titles Schemes Management Act, 8 of 2011 (“STSMA”) and Regulations (“STSM Regulations”) were implemented to replace the governance requirements in the Sectional Titles Act, 95 of 1986. On the same date, the Community Schemes Ombud Service Act, 9 of 2011 (“CSOS Act”) and its Regulations (“CSOS Regulations”) were implemented.
From that date, all bodies corporate were automatically deemed to have adopted a prescribed set of Management Rules. These Rules are found in Annexure 1 of the STSM Regulations. Besides requiring a statutory audit as mentioned above, the auditor is also required to express an opinion as to whether or not:
- The body corporate has complied with the accounting requirements set out in rules 21, 24 and 26, with a specific description of any failure to comply with such requirements;
- The books of account of the body corporate have been kept and its funds have been managed so as to provide a reasonable level of protection against theft or fraud; and
- The financial affairs of the body corporate appear to be effectively managed.
These annual financial statements and audit must be completed within four months of the end of the body corporate’s financial year.
Section 3 of the STMSA requires a body corporate to establish an administrative fund for the estimated annual operating costs, and a reserve fund to cover the cost of future maintenance and repair of common property. Rule 26(1)(b) requires the body corporate to keep separate books of account and separate bank accounts for its administrative and reserve funds.
The minimum amount of the annual contribution to the reserve fund is determined in accordance with STSM Regulation 2 as follows:
- If the amount of the reserve fund at the end of the previous financial year is less than 25% of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund.
- If the reserve fund at the end of the previous year was equal to or greater than 100% of total contributions to the administrative fund for that previous year, there is no minimum contribution to the reserve fund.
- If the amount of the reserve fund in the prior year is more than 25% but less than 100% of the total contributions to the administrative fund in the prior year, the budgeted contribution of the reserve fund must be at least the amount budgeted to be spent from the administrative fund on repairs and maintenance to the common property in the financial year being budgeted for.
For a body corporate that has not created a reserve fund, the budgeted contributions to this reserve fund for the 2017/18 year-end must be at least 15% of the budgeted contributions to their administrative fund. However, rule 21(3)(b) limits the maximum increase on the annual contribution to 10% at the end of the financial year.
Schemes that are unable to reach the regulated threshold may approach the Ombud (discussed below) with a plan on how they anticipate to reach the maximum threshold.
The Community Schemes Ombud Service (“CSOS”)
The CSOS regulates the conduct of parties within community schemes and ensures their good governance including the compliance with laws and regulations. They also offer complaint resolution and arbitration for problems between owners and body corporate, and / or managing agent.
The CSOS Act 9 of 2011 requires all community schemes to register with the Ombud’s office within 30 days of the effective date (7 October 2016) of the Act. Community schemes must therefore have registered by 5 November 2016. Registration is done by completing a form and submitting certain documents.
Thereafter, the body corporate will need to submit a return and its financial statements annually, as well as pay a quarterly levy. The levies need to be collected from owners.
The levies payable are the lessor of R40 or 2% of the amount by which the levy per unit charged by the scheme exceeds R500. If the levy is less than R500 per unit, the community scheme is exempt from paying levies.
For further information, the Chief Ombud issued Circular No.1 of 2017 on 17 March 2017 which provides operational guidelines and clarity on the implementation of the STSMA and the STSM Regulations.
Leslie Mac Donald CA(SA), RA
Director | Audit, Johannesburg