Legal Issues

The Impact of the Carbon Tax on Bodies Corporate

Al Gore said in the infamous documentary about global warming – The Inconvenient Truth – “The earth is so big we can’t possibly have a long lasting harmful impact on the earth’s environment and maybe that was true one time but it’s not anymore!”

This documentary provoked and grabbed the attention of people and politicians around the world about the effects of global warming. Global warming is the current rise in the average temperature of Earth’s oceans and atmosphere and its projected continuation. The scientific consensus is that global warming is occurring and was initiated by human activities, especially those that increase concentrations of greenhouse gases in the atmosphere, such as deforestation and burning of fossil fuels.

On 10 June 2011, prime minister Julia Gillard announced a carbon tax that would come into effect from 1 July 2012. “At the essence of this is the actual price signal to the big polluters,” Ms Gillard said.

A carbon tax is a tax on energy that emits carbon dioxide. The purpose of a carbon tax is to reduce emissions of carbon dioxide and thereby slow global warming. Australia produces about 500 million tonnes of carbon pollution each year and the carbon tax is part of the first step to reducing this amount.

In short, how the carbon tax works is the federal government imposes a carbon price, paid by Australia’s largest polluters, who are responsible for burning large amounts of fossil fuels (coal), petroleum products such as petrol and aviation fuel, and natural gas. Some revenue from the carbon tax will be used to compensate households for price rises.

It is then predicted that renewable energy and low-emissions goods become more competitive. This is supposed to encourage households to change to low emissions goods. Carbon-intensive industries are therefore forced towards lower emissions. Primary costs will increase for the property industry as a result of the carbon price flowing through to construction and operational costs.

In effect, the carbon tax will make some goods and services that are produced with lots of energy more expensive. Households can expect to see consumer prices rise by an average of 0.7% (government figures) due to the effect of the carbon price on large emitters.

Bodies corporate should therefore consider factoring in the impact of the carbon tax in their budgets for 2012.

How will the carbon tax impact upon a body corporate in terms of the administrative fund and sinking fund? Currently, no direct compensation has been provided for the property industry, however opportunity does exist for industry to benefit from complementary investment programs to create a greener, more efficient built environment. The announced plan does not include adequate safeguards to mitigate the risks to industry from the scheme, which include price gouging, where energy retailers take the government’s compensation but still pass on the “tax” impacts.

It is important to revisit and consider the process that needs to be undertaken for a body corporate to set a new budget for the following financial year. At each annual general meeting of the body corporate, it must by ordinary resolution, adopt an administrative fund budget and sinking fund budget and fix the contributions to be levied on each lot owner, decide the number of instalments (if more than one) and fix the date for payment.

If a liability arises and the body corporate has not made provision for it in its budgets, then the body corporate must fix a special contribution.

The budget for the administrative fund must contain an estimate for the body corporate’s financial year of the necessary and reasonable expenditure to cover the cost of maintaining the common property, body corporate assets, and other expenditure of a recurrent nature (such as payment under service contracts, body corporate, administrative agreement, routine maintenance of the common property, electricity, consumables, bank charges, etc).

The budget for the sinking fund is applied towards spending of a non-recurrent nature, the periodic replacement of major capital items and other spending that should reasonably be met from capital (like repainting the building, replacing the roof, replacement of windows, etc). The budget for the sinking fund must allow a reasonable capital amount, both to provide for necessary and reasonable expenditure from the sinking fund for the current year, and also reserve an appropriate proportion necessary to be accumulated to meet anticipated expenditure over at least the next nine years.

Bodies corporate need to take into account likely increases in electricity, gas and fuel as well as considering the increased cost of any proposed refurbishment or other building works. Once the effect of the carbon tax is known, bodies corporate may need to obtain a revised sinking fund report.

For those bodies corporate who do not make a provision for the carbon tax in their budgets post 1 July 2012, they may need to adjust either or both of their administrative fund and sinking fund at their annual general meeting but it must be no more than 10% of the proposed budget amount. In unforseen circumstances, bodies corporate may need to fix a special levy.

As the carbon tax will take effect from 1 July 2012, it is essential that bodies corporate consider how the rise in costs will affect their individual circumstances. Planning now for the rising costs will only benefit lot owners in the long run.

Ros Janes
Success Law

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