Financial management of retirement villages is heavily regulated by the Retirement Villages Act 1999 (NSW).  Complying with these statutory obligations can be challenging, particularly when recurrent charges remain uncollected from a previous year.  

The NSW Civil & Administrative Tribunal Appeal Panel has provided useful guidance in relation to several financial management issues in Sakkara Investment Holdings Pty Ltd atf Sakkara Landings Trust v The Residents Committee of The Landings Retirement Village [2016] NSWCATAP 52.

Background

In 2011 and 2012, the operator (Sakkara) applied to the NSW Civil & Administrative Tribunal (NCAT) for orders setting down an approved annual budget for the 2011/2012 and 2012/2013 financial years, which eventually occurred by orders dated 14 November 2014 (November Orders).  The November Orders also set a recurrent charges figure for each financial year pursuant to s108(2) of the Retirement Villages Act 1999 (NSW) (Act), which happened to be higher than what residents actually paid during each financial year.  Both financial years had ended at the time the November Orders were made.

The Residents Committee had separately applied to NCAT for orders relating to the 2013/2014 approved budget (RV15/57001).  That budget had been amended by resident consent to raise additional recurrent charges to pay for anticipated utilities increases.  The audited accounts for that financial year showed that the increase was lower than anticipated.  The Residents Committee sought a refund of the residual.  Sakkara contested the refund claim on grounds that  the residual was used to pay for other line items, as permitted by s116(3A) of the Act.

The 2011/2012 and 2012/2013 accounts were reaudited in light of the November Orders (Audited Accounts) and Sakkara invoiced residents for additional recurrent charges pursuant to the November Orders.  The Residents Committee expanded RV15/57001 to seek an order prohibiting collection of the additional amounts.

First instance decision

On 3 September 2015 NCAT made order (relevantly) requiring Sakkara to:

• refund the residual raised for utilities increases (Order 2).

• re-audit the 2013/2014 accounts to take into account a ‘net surplus’ figure, calculated by offsetting the 2011/2012 deficit against the 2012/2013 surplus in the Audited Accounts, and make good any final deficit (Order 4).

• withdraw all invoices issued and not issue any further invoices pursuant to the November Orders (Order 5).

• repay any amount collected under the invoices issued pursuant to the November Orders (Order 6).

Sakkara appealed the above orders.  Of these, the Appeal Panel set aside Orders 4 and 6.

Preparing audited accounts – form requirements

Section 116(3) of the Act requires an operator to only expend recurrent charges in accordance with the approved budget (including budgets amended under s117).  Section 116(3A) allows a departure from this rule if the expenditure is a variation between items in that budget, does not reduce the level of services provided to residents, and does not cause the total expenditure in the budget to be exceeded.  

The Appeal Panel confirmed that if the operator wishes to rely on s116(3A), it bears the onus of establishing that each element of s116(3A) was satisfied. The Appeal Panel noted that audited accounts prepared in accordance with s119(4) could be used to prove these elements.  Section 119(4) states:  The format of the accounts must correspond as closely as possible with the layout of the proposed annual budget.  As the proposed annual budget is the basis of the annual budget, the annual budget and audited accounts ought to correlate.  This ought to allow a Court to compare the two in order to determine whether each element of s116(3A) was satisfied.  Sakkara's audited accounts did not allow this comparison because the line items of the audited accounts differed to those in the amended annual budget.

Preparing audited accounts – calculating income

The Appeal Panel found Orders 4 to 6 were made because NCAT did not appreciate that the Audited Accounts recorded income on an accruals basis – that is, the income amount included the amounts payable but not yet collected under the November Orders.  In making its finding, the Appeal Panel confirmed that audited accounts could record income in this manner.

Dealing with surpluses and deficits

The Appeal Panel found that NCAT erred in finding there was a ‘net surplus’ in fact (because the deficit was already made good) and at law, because the Act required that the audited balance for each financial year must be dealt with separately.  

Collecting recurrent charges

The Residents Committee’s position was that additional recurrent charges could not be collected under the November Orders because the relevant financial years had ended.  The Appeal Panel rejected this position, finding that the November Orders could not be said to have no practical utility merely because each financial year had ended when they were made.  

Lessons for operators

• Make it a condition of any auditor engagement that the auditor prepare audited accounts that comply with s119(4) of the Act. 

• Audited accounts may be calculated on an accruals basis. 

• Do not seek to ‘set off’ surpluses or deficits between financial years.   

• If NCAT sets a recurrent charges figure under s108(2) of the Act, the operator is entitled to collect that amount even after the relevant financial year ends.  

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.