Retirement Villages Regulation 2009 commence, without Regulation 5.1(a). Government stops funding of replacement for non-fixed items of capital from recurrent charges
On Thursday 25 February 2010, in a dramatic last minute twist to the protracted commencement to the Retirement Villages Regulation 2009 (Regulations), the Shadow Minister for Fair Trading, Greg Aplin, moved a Motion of Disallowance to the New South Wales Parliament that Regulation 5.1(a) be removed from the Regulations). The motion was successful by a narrow margin and Regulation 5.1(a) has been removed.
The Regulations and the amendments to the Retirement Villages Act 1999 commence on Monday, 1 March 2010
Gadens has prepared a powerpoint presentation and operator checklist to assist operators and village managers to understand the changes made to the Retirement Villages Act. You can receive a copy of the presentation and checklist by sending an email to Arthur Koumoukelis or John Fairgray at firstname.lastname@example.org or email@example.com.
What is Regulation 5.1(a)?
The Amendment Act made fundamental changes to Part 7 of the Retirement Villages Act. The Retirement Villages Act defined and allowed recurrent charges to fund work on items of capital, including to fund the replacement of non fixed items of capital.
The Amendment Act then changed the definition of 'capital
maintenance' at section 4 to simply mean:
"works carried out for the purpose of repairing or maintaining an item of capital and includes works prescribed by the regulations as being capital maintenance, but does not include works that are prescribed by the regulations as not being capital maintenance."
Regulation 5.1(a) had been drafted to expand the definition of capital maintenance to include:
- work done to prevent or repair defects in, damage to, or deterioration of, an item of capital;
- replacement of a non-fixed item of capital; and
- replacement of a component of an item of capital that is necessary for the proper operation of an item of capital.
By removing this Regulation 5.1(a), the definition of capital maintenance is limited to the definition under the Retirement Villages Amendment Act 2008 and the words in Regulation 5.1(b).
The definition remains further expanded by operation of
Regulation 5.1(b) to explain what is not capital maintenance
- work done to substantially improve an item of capital beyond its original condition;
- work done to maintain or repair an item of capital in circumstances where it would have been more cost effective to replace the item of capital.
What does this mean to an operator?
The key effect of this late change is to stop village operators funding replacement of non-fixed capital items from recurrent charges collected from residents or from the capital works fund.
This means items as minor as a chair or a lawn mower or non fixed water heaters and items as significant as say a village bus which previously could be funded from recurrent charges and long term maintenance funds can no longer be funded from resident contributions.
This is a fundamental change not only to the proposed Amendments but in fact puts the funding of capital maintenance to a position that was not even the case under the existing Act. It effectively leaves the definition of what constitutes repairs and maintenance, as opposed to replacement, squarely in the common law and income tax definitions.
This means determining whether replacing some pavements on a path is a repair or a replacement.
By keeping Regulation 5.1(b), there is a further complication for operators in that work done to 'substantially improve' or work done beyond the cost effectiveness of repair is excluded from the definition of 'capital maintenance'.
Given the experience of the majority of Tribunal decisions being related to defining 'capital maintenance' such a change in the legislation will mean the likelihood of disputes will increase especially in relation to what is work done to 'substantially improve' and 'cost effectiveness of repairs'..
This puts additional pressure on operators to reach agreement with residents on levels of recurrent charges and budgets. Under the new Amendment Act this can be achieved through fixed formula recurrent charges and increases for non fixed formulas by no more than CPI.
Operators will need to reconsider their financial models and immediately plan to fund replacement of non fixed items of capital items from funds other than recurrent charges and capital works fund.
This change will invariably have a significant financial impact on certain operators, and in particular put increased pressure on the smaller operators in the industry.
What is an item of capital?
Items of capital are defined at section 4(1) of the Act
- any building or structure in a retirement village, and
- any plant, machinery or equipment used in the operation of the village, and
- any part of the infrastructure of the village, and
- any other item prescribed by the regulations,
Regulation 4 of the Regulations expands this definition at paragraph (d) to include:
- fixtures (for example, bench tops, built-in cupboards and wardrobes, floor coverings, hot water systems and stoves),
- fittings (for example, light fittings, taps and sanitary fittings),
- furnishings (for example, curtains and blinds), and
- non-fixed items (for example, whitegoods, portable air conditioners, fans, tables and chairs).
Regulation 4 has not been removed and remains in place.
Next steps for operators and the industry
Operators must now take steps to re-assess their costs of operating in this industry carefully and make necessary provision for replacement of items of capital from their own funds.
They should consider their financial model and consider how replacement of items of capital is to be funded. In circumstances where the financial elements of a village are ingoing contribution levels, deferred management fee levels and recurrent charges, the options are limited.
It would be a bitter irony if the Government's intention of removing Regulation 5.1(a) and retaining Regulation 5.1(b) in order to make the cost of living in a retirement village cheaper in fact means moving into a retirement village becomes less affordable for many people.
Arthur Koumoukelis is the partner in charge of Gadens Lawyers Sydney and national aged care retirement village practice, John Fairgray is a senior associate of Gadens Lawyers, Sydney specialising in retirement village and aged care law. This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.