The STSMA (The Sectional Titles Scheme Management Act) requires the body corporate to establish a reserve fund to cover the cost for the future maintenance and repair of the common property. This fund is established in addition to the administrative fund and specifically for the maintenance, repair, and replacement of the common property. The purpose of the reserve fund is to finance unexpected costs or the future maintenance of repairs to or replacement of common property. The fund is supposed to cover expenses not foreseen when the budget was drafted. The reserve fund is made up of the following:

• Any part of the annual levies designated as such.
• Any money received from insurance policies that paid out due to claims of damage or destruction of the common property.
• Any interest on investments of money.
• Any other amounts as specified by the body corporate.

All other body corporate income must, however, be paid into the administrative fund.

The money paid out from the reserve fund should be in accordance with trustee resolutions and an approved maintenance, repair, and replacement plan. The body corporate must prepare a budget for the reserve fund that will be presented at the AGM.

Regulation 2 of the STSMA regulations prescribes how the minimum amount of the annual contribution to the reserve fund must be determined. At all times, the value of the reserve fund should be equal to 25% of the total contributions to the administrative fund per annum.

The following rules apply in terms of STSMA Regulation 2:

If the amount of money in the reserve fund at the end of the previous financial year is less than 25% of total contributions to the administrative fund for the previous financial year, the budgeted contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund, illustrated as follows:

• Year end 30 September 2020: Budgeted contributions R550 000
• Previous year end 30 September 2019
• Reserve fund 30 September 2019: R100 000
• Total contributions 30 September 2019: R500 000
• 25% of the total contributions of R500 000 is R125 000
• The reserve fund is thus less than 25% of the total contributions of R500 000
• 15% of the budgeted contribution to the administrative fund of 2020 must be budgeted for in addition (15% of R550 000, thus R82,500)
• The budgeted amount for the new year must be R550 000 + R82 500 = R632 500

If the amount of money in the reserve fund at the end of the previous financial year is equal to or greater than 100% of the total contributions to the administrative fund for the previous financial year, there is no minimum contribution to the reserve fund, illustrated as follows:

• Year end 30 September 2020: Budgeted contributions R550 000
• Previous year end 30 September 2019
• Reserve fund 30 September 2019: R550 000
• Total contributions 30 September 2019: R500 000
• No extra amount
• The budgeted amount for the next year will be R550 000

If the amount of money in the reserve fund at the end of the previous financial year is more than 25%, but less than 100% of the total contributions to the administrative fund for the previous financial year, the budgeted contribution to 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, illustrated as follows:

• Year end 30 September 2020: Total budgeted amount R550 000; budgeted amount for repairs and maintenance R100 000 (included)
• Previous year end 30 September 2019
• Reserve fund 30 September 2019: R150 000
• Total contributions 30 September 2019: R500 000
• 25% of the contributions is R125 000. Therefore, more than 25% and less than 100%.
• The budgeted amount for 30 September 2020 must be R550 000 plus R100 000 (maintenance and repairs)
• Total amount of R650 000

The amount objective is for every scheme to have at least one year’s levy income/administrative or operational fund in its reserve fund. The administrative fund is simply the scheme’s budgeted expenses for one year, excluding the reserve fund contribution.

Audit impact of non-compliance with the requirements of STSMA Regulation 2

Although the illustrations provided above appear simplistic, the calculations in real life can be complex. In the event of non-compliance with the above requirements it may have a negative impact on the audit report of the Body Corporate. In some instances it may even results in a reportable irregularity being reported by the auditor with the Independent Regulatory Board for Auditors (IRBA) which would require the trustees to make written representations on why there was such non-compliance.

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