Managing the Reserve fund

The Auditor is qualifying the audit because of the Reserve fund – they are saying that we did not manage the reserve fund correctly. How are we then supposed to manage the Reserve fund?

Managing the Reserve fund entails two processes –

  • Transfers into the reserve fund bank account (yes it must be a separate bank account)
  • Transfers out of the reserve fund bank account

Each Body Corporate unit pays a separate reserve fund levy as per the STSM Act.  These levies must be transferred to the Reserve fund at least on a monthly basis.  If what is raised does not balance with what is in the bank account the auditors will qualify the audit.

Ito transfers out of the reserve fund account we must make sure that

  • We have the necessary Trustee resolution signed
  • We must transfer the funds before paying the invoice.

We pay invoices from the Trust account so we must ensure that the money was transferred from the Reserve fund to the Trust account BEFORE we pay the invoice.

The relevant quotes from the STSM Act being:

PMR 24

(2) The reserve fund maintained in terms of section 3(1)(b) of the Act must be used for the implementation of the maintenance, repair and replacement plan of the body corporate referred to in rule 22.

(3) The following amounts must be paid into the reserve fund —

  • any part of the annual levies designated as being for the purpose of reserves or the maintenance, repair and replacement plan;
  • any amounts received under an insurance policy in respect of damage or destruction of property for which the body corporate is responsible;
  • any interest earned on the investment of the money in the reserve fund;
  • any other amounts determined by the body corporate, and all other body corporate income must be paid into the administrative fund. 

(4) Money may be paid out of the administrative fund in accordance with trustee resolutions and the approved budget for the administrative fund.

(5) Money may be paid out of the reserve fund —

  • at any time in accordance with trustee resolutions and the approved maintenance, repair and replacement plan; or
  • if the trustees resolve that such a payment is necessary for the purpose of an urgent maintenance, repair or replacement expense, which purpose includes, without limitation —

(i)  to comply with an order of a court or an adjudicator;

  • to repair, maintain or replace any property for which the body corporate is responsible where there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage to persons or property;
  • to repair any property for which the body corporate is responsible where the need for the repairs could not have been reasonably foreseen in preparing the maintenance, repair and replacement plan; or
  • to enable the body corporate to obtain adequate insurance for property that the body corporate is required to insure;

     provided that the trustees must report to the members on any such expenditure as soon as possible after it is made.

In terms of bank accounts the STSM Act states that all monies received must be paid into an interest-bearing bank account that is either:

  • In the name of the BC or

Into a Trust account

Quote from the STSM Act:

PMR 21(4) The body corporate must ensure that all money received by the body corporate is deposited to the credit of an interest-bearing bank account—

  • in the name of the body corporate; or
  • that is a trust account opened in terms of either the Estate Agency Affairs Act, 1976 (Act No. 112 of 1976), or the Attorneys Act, 1979 (Act No. 53 of 1979).

We work on a Trust account system where each BC has its own Trust account in our Trust account. This is done in terms of Section 32(1) of the Estate Agency Affairs Act, Act 112 of 1976.  This gives protection to the Body Corporate ito the EAAB’s fidelity fund.  All income for the BC goes into this account and all expenses are paid out of this account.

After all the expenses have been paid in a month there should be some surplus funds available for the BC to put aside. It is therefore provided in the STSMA for the BC to open an investment account(s). 

Quote from the STSM Act:
PMR 21(3)

  • invest any moneys in the reserve fund referred to in sections 3(1)(b) of the Act in a secure investment with any institution referred to in the definition of “financial institution” in section 1 of the Financial Services Board Act, 1990 (Act No. 97 of 1990);

History
Before 1997 the Act stated that any funds not immediately required for disbursement may be invested in a savings or similar account with any building society or any other registered deposit receiving institution approved by the Trustees from time to time. In 1997 it was amended to state that it may be invested with any registered building society or bank.

The STSM Act also stipulates that there should be separate bank accounts for the Administrative Fund and the Reserve Fund.

Quote from the STSM Act:
PMR 26(1)    A body corporate must—

  • keep separate books of account and bank accounts for its administrative and reserve funds referred to in sections 3(1)(a) and (b) of the Act;

Our Trust account is used as the bank account for the Administrative Fund and we then open a separate investment account for the Reserve Fund.  We also operate on the system of having a second investment account in the name of the BC for day to day surplus funds that are not part of the Reserve Fund.

We have the option for our BC’s to open an investment account with Investec or Nedbank.  It is in the name of the BC and covered by the EAAB Fidelity Fund and our own PI cover.

The BC also do not earn interest on the monies sitting in the Trust account so it is important that surplus funds be transferred monthly to the investment account.