Retirement villages: Revised code supplementary information

Enhanced consultation requirements by:

• clarifying the importance of an administering body engaging in effective consultation with residents (clause 4(e) and 16) (Recommendations 61 and 62);
• clarifying the matters that must, as a minimum, be included in village operating budget proposals, quarterly financial statements and annual financial statements and provided to residents (clauses 17, 18, 19, 26(1)(a) and (b)) (Recommendations 43, 48, 52 and 54); and
• specifying that retirement villages with a reserve fund that residents must contribute to, must provide residents with budget proposals annually, quarterly financial statements and annual financial statements for the reserve fund (clauses 16, 17, 18, 19, 20, 26(1)(a) and (b)) (Recommendations 41, 43, 48, 52 and 54)).

 Enhanced refurbishment requirements by, for example:

• introducing a definition of ‘refurbishment work’ (clause 22(1)) (Recommendation 76);
• clarifying the information that an administering body must give a resident regarding items of refurbishment work to be done (clause 22(2)(a) and (b)) (Recommendations 76 and 77);
• inserting a requirement for the former resident or their personal representative to be given a reasonable opportunity to inspect refurbishment works that they will be contributing to (clause 22(2)(b)(iii)) (Recommendations 76 and 77);
• clarifying matters to which an administering body must have regard when assessing what refurbishment work may be required (clause 22(3) (Recommendations 76 and 77); and
• building upon the State Administrative Tribunal’s existing jurisdiction to deal with refurbishment disputes to ensure that the arrangements relating to the costs of refurbishment are fair for both the resident and the administering body (clause 22(4)).

Enhanced provisions relating to residents’ committees and meetings of residents by for example:

• providing residents with the capacity to establish a residents’ committee as an incorporated association to carry out the function of the residents’ committee (clause 25) (Recommendation 61);
• providing for voting at a residents’ meeting to be conducted by secret ballot (clauses 25(1)(1) and (j) and clause 26(14)) (Recommendation 64);
• clarifying the circumstances in which an administering body may attend a meeting of residents at which a special resolution is to be considered and providing a capacity for residents to nonetheless decide by a simple majority during the meeting, that the administering body must leave the meeting (clauses 26(15) and (16)).

Enhancing the dispute resolution provisions by for example:

• clarifying that the person nominated by the administering body to deal with the dispute must be acceptable to both the administering body and resident(s) (clause 30(2)(a)) (Recommendation 68);
• clarifying in relation to the dispute process or disputes that are referred to mediation, that any costs incurred in relation to these must be shared equally between the parties and that the administering body must not recover its share of the costs from a resident or former resident (clause 32).

The Interim Code currently provides a “model” operating budget, quarterly financial statement and quarterly reserve fund statement that contain various particulars.

As the use of these model forms has not been mandatory, a wide variety of forms have evolved with some providing significantly more detail than others. To improve the consistency and transparency of village operating and reserve funds, the proposed changes will increase the level of disclosure by:

• replacing the model forms with a minimum level of disclosure in the form of specified line items which must be separately disclosed in the operating budget, reserve fund budget and quarterly and annual financial statements;
• requiring additional line items, headings and subtotals to be disclosed in the budgets and financial statements when they are relevant to an understanding of the financial performance and position of the village; and
• requiring explanatory notes to be prepared for the budgets and financial statements where additional clarification is necessary (e.g. when actual expenditure on an item differs significantly from what was proposed in the budget).

At its meetings with representative stakeholder groups (Property Council, ACSWA & WARVRA) in 2013, the Department communicated its intention to improve the transparency of village operating and reserve funds by amendments to the Code. In October 2013 the Department invited written submissions from these groups regarding the line items of income and expenditure that should be separately disclosed in the budgets and financial statements. These submissions informed the amendments to the financial reporting requirements in clauses 17, 18 and 19.

Proposed clause 17 will specify certain items of income and expenditure that must as a minimum be disclosed in the operating budget. It also separates out different items of income.

Amounts collected for the purposes of a reserve fund are also required to be reported on and shown in a separate reserve fund budget. For this purpose the term ‘reserve fund’ is proposed to be defined as ‘a fund that is, or is proposed to be established for the purpose of accumulating funds to meet the costs of repairs, replacements, maintenance and renovations within the retirement village, regardless of whether money in the fund is held in a separate account and if the village is comprised of a strata plan or survey-strata plan registered under the Strata Titles Act 1985 it includes any reserve fund established by the relevant strata company under that Act’. 

Proposed clause 17 will also require the preparation of notes to the budget to aid the reader’s understanding of the budget. Proposed notes will address a range of matters such as  the method of calculating recurrent charges, including any reserve fund contributions, the method of calculating the administering body’s contribution under section 23(5) of the Act, a breakdown of auditor’s remuneration into audit and non-audit services and, for each item that results from apportioning expenses between the village and other entities, the method of calculation and an itemisation of each material component of the line item that is not separately disclosed elsewhere. This last disclosure is designed to encourage more transparent disclosure of items that have been apportioned.

The proposed provisions that relate to a separate reserve fund budget will partially implement recommendations 48, 52 and 54 of the Final Report by clarifying the information that must be provided with respect to retirement villages that already have a reserve fund.  This will ensure a greater level of transparency regarding existing reserve funds and make administering bodies more accountable for expenditure on maintenance, repair, replacement and renovation. As monies in a reserve fund may be accumulated through a recurrent charge and through charges a resident pays after permanently vacating a village, a reserve fund budget will have to separately disclose the reserve funds income according to the sources of that income. In relation to expenditure items a range of line items will have to be disclosed including each material class of similar items of expenditure from the reserve fund e.g. repairs, replacements, maintenance and renovations of a capital nature.

As is currently the case, administering bodies will continue to be required to prepare and provide to residents the following information each quarter:

• a statement of income and expenditure, showing actual and budget amounts, and using the same line items as the operating budget; and
• a reserve fund statement, showing actual and budget amounts, and using the same line items as the reserve fund budget.

In addition, it is proposed that quarterly statements will include additional line items, headings and subtotals that may be relevant to understanding the village’s financial performance. Quarterly statements will also have to be accompanied by notes that contain similar information to the budget notes with an explanation for any significant variations between actual and budgeted expenditure (both operating and reserve fund expenditure) together with any other information that may be relevant to understanding the village’s financial performance during the quarter.

Proposed clause 19 will clarify the annual statements are to comprise a statement of income and expenditure, reserve fund statement and statement of financial position (i.e. balance sheet) showing comparative information (i.e. previous and current year amounts). These statements are to present, fairly, the financial performance and financial position of the village and include additional line items where relevant. An audit report must also be included, unless residents have made a special resolution that the financial statements for that financial year are not to be audited.

The proposed notes to the annual financial statements will be similar to those required for the quarterly financial statements.

It is also proposed the statement of income and expenditure and reserve fund statements will take the same form as the quarterly statements. As with clauses 17 and 18, a number of minimum line items will be required in a statement of financial position.  

The specified line items have been adapted from a number of Australian Accounting Standards.

Consistent with Recommendation 43 of the Final Report, new clause 19 will require annual financial statements of a retirement village to be audited by a member of a professional accounting body with a public practice certificate unless the residents decide, by special resolution at the annual meeting, that an audit is not required. This decision will apply for the financial year in which the special resolution is made. In relation to the costs of an audit it is proposed that residence contracts will state which party bears the cost of the audit under provisions that are to be prescribed for the purpose of section 14A of the Retirement Villages Amendment Act 2012 (the Amendment Act).

These provisions reflect stakeholder submissions on the Code discussion paper released in 2013, and subsequent consultation with stakeholders, that highlighted the importance of auditing as a mechanism that provides an independent level of scrutiny of a retirement villages accounts. Recognising this, it is proposed that the waiver of an audit will not be indefinite but will only apply for the financial year in which the special resolution is made.           

In July 2013 the Department released a discussion paper on amendments to clause 22 of the Interim Code that were proposed to be included in the revised code (July discussion paper).

In part, the proposals reflected Recommendation 77 of the final report that recommended that the Department may conciliate in matters where:

• residents, or their personal representative, believe that proposed refurbishment works are not warranted; and/or
• the estimated cost of the proposed works is excessive; and/or
• the estimated time to complete the works is excessive.

Noting the Department already had the power to conciliate on all these matters, the July discussion paper proposed that clause 22 be amended:

• so that, before commencing refurbishment work, the administering body must provide the resident with:
  • a written itemised estimate of the work (including the cost of the work) that the administering body claims the resident is liable to pay for under the contract; and
  • an estimate of when the work is to be commenced and completed;
• to give outgoing residents a reasonable opportunity to query or negotiate as to the necessity, proposed timing of commencement and completion, and cost of the refurbishment work, before the work is carried out; and
• to clarify and extend the jurisdiction of the State Administrative Tribunal (SAT), so that the resident (or their representative) may apply to the SAT before or after the commencement or completion of the work, where they are of the opinion that:
  • the estimate of when the work is to be commenced and completed, or the actual time being taken to commence or complete the work, is unreasonable; or
  • the estimated or final cost of the work is excessive; or
  • the residential premises were in a condition required by the residence contract at the time the resident permanently vacated the premises.

In responding to these proposals, industry representatives expressed strong opposition to residents having the opportunity to negotiate on each and every refurbishment and noted that the required standards of refurbishment were generally set out in the terms of a residence contract. There was, however, some acceptance by industry that the meaning of refurbishment should be clarified and that this could be achieved by clarifying the difference between “reinstatement work” and “renovation work”.

These issues were further discussed during a stakeholder meeting in October 2013 wherein the Department undertook to prepare a policy paper for industry and residents to comment on. That paper was provided to stakeholders in late October 2013 (the October policy paper) and their input was received in February 2014. 

The proposed changes in the July discussion paper, October policy paper and stakeholder feedback on each were reflected in the drafting instructions for the revised code.

During the drafting process it became increasingly obvious that drawing clear distinctions between “reinstatement works” and “renovation works” and providing appropriate consumer protections around “renovation works” would result in a range of complex and inflexible provisions that had the potential to produce insurmountable difficulties for administering bodies and former residents. Most of the complexity arose out of trying to address the circumstances in which requiring a resident to contribute to the costs incurred for renovation works might be reasonable, for example where the resident is to receive most of the capital gain from the premises being renovated. This in turn created the difficulties with ensuring that a resident could only be required to contribute to renovation costs where, in fact, the resident would obtain more of the capital gain than the administering body.

Given some residence contracts limit the amount of premium a resident is repaid (the repayable premium) by calculating a number of deductions from that premium as a percentage of an incoming premium – making provision for fairness in relation those residence contracts was fraught with complexity and difficulty. So the policy settings were further reviewed with a view to adjusting the existing framework around refurbishment in clause 22 of the Code to allow the industry to fairly manage the refurbishment of residential premises. Therefore the proposed provisions seek to:

• clarify the level of information that a resident is entitled to receive regarding refurbishment of the premises that they have permanently vacated;
• introduce a level of consistency in the standard that residential premises must be refurbished. Currently, refurbishment clauses in residence contracts range from a reasonable standard allowing for fair wear and tear, to wholesale gutting and renovation of premises without regard to the age and standard of other “like” premises in the village or the standard to which the retirement village as a whole has been maintained; and
• provide residents with the capacity to challenge unfair arrangements in the State Administrative Tribunal.

Noting the above objectives, the proposed provisions include:

• a definition of “refurbishment works” that includes maintenance, repairs, replacements or renovations, and picks up on the proposal for “reinstatement works” to be about returning residential premises to a reasonable standard;
• the proposals in the July discussion paper to require, where the resident permanently vacates the residential premises and has to contribute in whole or part to the costs of refurbishment works, the administering body to give the resident or their personal representative, prior to any works commencing to refurbish the premises, a written statement setting out:

1. itemised details of the reinstatement work the administering body believes is required to be done in relation to the residential premises; and
2. where the administering body is arranging for the reinstatement works:
   1. an estimated cost for each item of work; and
   2. a proposed timeframe for the commencement  and completion of the works, including details of any factors that may impact on when the works are commenced or completed;

• proposals in the October policy paper to require an administering body, when assessing what refurbishment works are required to the residential premises, to have regard to:
  • the age, character and physical condition of the residential premises at the time the resident entered into occupation of the premises;
  • the age, character and physical condition of other comparable residential premises in the retirement village at the time the resident permanently vacated the residential premises; and
  • the age, character and physical condition of the common facilities and amenities in the retirement village at the time the resident permanently vacated the residential premises.

The last of these has been included as a mechanism to ensure that an administering body cannot require a resident to pay for refurbishments that return the residential premises to a higher standard than the administering body has applied in relation to obligations to repair, maintain, replace and renovate common areas and facilities within the village;

• a requirement that former residents can inspect the premises that have been refurbished prior to paying the administering body for costs incurred in relation to the refurbishment;
• additional grounds for appeals to the SAT to ensure that a resident can challenge refurbishment costs that are excessive or unreasonable. In this regard an additional ground has been included whereby a resident can appeal to the SAT if the proportion of total costs that are to be paid by the former resident or the former resident’s personal representative is excessive or unreasonable. This ground has been included to enable residents to challenge a requirement to pay the full amount of costs incurred for renovation works where the resident will receive proportionately less of any capital gain in the repayment of their premium than the administering body.

When the Amendment Act was considered in the Legislative Council, the Hon. Lynn MacLaren MLC moved amendments to change the reference to ‘special resolution’ in section 57A to ‘ordinary resolution’ and to set out the requirements for passing an ordinary resolution.

The purpose of the amendments was to ensure that residents could make a decision to take a dispute about an increase in recurrent charges or the imposition of a levy to the SAT without intervention from the administering body. As Ms MacLaren put it ‘[T]he current situation is that in order to consider these special resolutions, the administering body has to be involved in calling a meeting … This is just trying to loosen up the stringent criteria set in place by the current rules and regulations that require a special resolution’.

Ultimately the proposed amendments did not proceed because opposition members in the Legislative Council supported then Minister Simon O’Brien’s view that they should not do so. A reason for their support was the fact that the provisions relating to residents meetings and special resolutions in the code were in the process of being reviewed. As Minister O’Brien put it ‘[m]atters around the calling and conduct of meetings at which a special resolution may be passed are issues most appropriately dealt with in the code’ and ‘the code is up for review now’. In responding to Minister O’Brien on the review of the Code, the Hon Kate Doust MLC said ‘That would be the opportunity then perhaps to have the broader discussion, and there might be options put in place that may satisfy the concerns of those individuals who want this as well. That may very well be the vehicle that is used to address these issues. On this occasion, unfortunately, the opposition will not support Hon Lynn MacLaren’s amendments as we support the special resolution that is currently in the Bill’.

As a result of the above discussions in the Legislative Council, the Department has undertaken a review of the provisions in the revised code relating to residents’ committees and residents’ meetings. In particular, the Department has sought to address the concerns raised by some residents that the residents’ committees in their villages are simply tools of the administering bodies and are not viewed as being representative of residents’ concerns.

WARVRA has also previously expressed concerns in stakeholder meetings that the capacity for residents to take a dispute about an increase in recurrent charges to the SAT may be unworkable if residents are unable to independently hold a meeting to discuss the special resolution without the administering body being present. In light of this a number of amendments to the revised code are proposed to address these issues including:

• clarifying that a residents’ committee can, of its own volition, call a meeting of residents on any issue including to discuss the proposed budget or financial statements;
• providing mechanisms by which a proposed special resolution can be distributed to residents either by the administering body or by those responsible for calling the meeting and a similar mechanism for the special resolution to be distributed to residents that were unable to attend the meeting;
• providing mechanisms for an administering body to be invited to attend a meeting of residents and to be asked to leave the meeting where a simple majority of residents at the meeting decide that the administering body should leave.