Whittaker & Lukins Associates (formerly Graham Lukins Partnership) are trading as Whittaker & Associates since 2019

QS Reports for Retirement Villages – Capital Replacement Fund Forecast

By |2021-10-17T07:57:19+00:00September 9th, 2019|Categories: Retirement Villages|

As quantity surveyors, Whittaker & Associates provide several reports designed to assist retirement village scheme operators with their legislative obligations.

These reports include:

    • Capital Replacement Fund – Ten Year Forecast
      Maintenance Reserve Fund – Ten Year Forecast
      Opinion of Replacement Cost for insurance purposes

Some background context for the Capital Replacement Fund

Retirement villages in Queensland are governed by the Retirement Villages Act 1999 (Qld) (Retirement Villages Act). The Retirement Villages Act was introduced to require greater transparency and accountability of each retirement village scheme in respect to residents. It creates extensive obligations for disclosure of information by scheme operators through a public information document (PID).

The Act also sets up comprehensive requirements for scheme operators, which, of interest to quantity surveyors, include the establishment of funds for maintenance and capital replacement of the village, and the control of setting ongoing fees.

In this article we are focusing our attention on the second report, the Capital Replacement Fund – Ten Year Forecast report. A sister report to the Maintenance Reserve Fund Forecast and completed together as a pair each year. It may be helpful to read about the Maintenance Reserve Fund in the first article if you haven’t done so.

What is a Capital Replacement Fund? [s 91]

Similarly, to the maintenance reserve fund, the scheme operator is also required to establish and keep a fund (the capital replacement fund) in a separate account (secured capital replacement fund account) which is used for replacing the retirement village’s capital items.

For this fund though, scheme operators themselves are solely responsible for contributions to this fund.

Payments are made into the capital replacement fund from:

  • payments from any insurance policies arising from the destruction of any capital items [s 94]
  • interest from investment of the fund [s 94]
  • a capital replacement fund contribution, which is either
    1. a percentage of the ingoing contribution paid by the resident as set out in the PID
    2. the amount determined by the quantity surveyor’s report

No amount standing to the credit of the fund may be applied or used for a purpose other than—

  • replacing the village’s capital items; or
  • paying the quantity surveyor’s reasonable fees for giving a report for section 92; or
  • paying tax on amounts paid into the fund under section 94(1)(b).

Regardless of any change in who controls the scheme’s operation, a statutory charge over the fund for the benefit of the residents is irrevocable and continues until the village ceases to operate as a retirement village scheme and all former residents have been paid their exit entitlement.

What are the capital items of a retirement village?2021-10-17T05:00:53+00:00

Capital items include—

  • all buildings and structures located in the retirement village and owned by the scheme operator, including the communal facilities, amenities and accommodation units, (other than items that, under the residence contract, are to be maintained, repaired and replaced by the resident);
  • all plant, machinery and equipment used in the operation of the village, (other than items that are body corporate property); including for example — communal hot water and air conditioning services, kitchen and dining room equipment, community facility furnishings, gardening equipment, village bus or transportation services
  • all village infrastructure owned by the scheme operator; including for example —roadways, pathways, drainage, sewerage mains, landscaping, electrical distribution systems, water services and connections and distribution systems
What is a capital improvement?2021-10-17T05:00:53+00:00

A capital improvement is the first time provision of a capital item.

What is maintenance of a capital item?2021-10-17T05:00:53+00:00

Maintenance of a capital item means the upkeep of the capital item in good condition and efficient working order.

What is meant by repair to a capital item?2021-10-17T05:00:53+00:00

A repair to a capital item means the restoration of the item by fixing or replacing parts of the item.

What is meant by replacement of a capital item?2021-10-17T05:00:53+00:00

Replacement of a capital item involves the substitution of the same type of item or an equivalent item.

How is the amount of capital replacement fund determined? [s 92]

The amount to be held in the capital replacement fund and the consequential contribution by the operator is determined each year by a quantity surveyor.
Before a scheme operator decides a budget under section 93, the operator must obtain an independent quantity surveyor’s written report about the expected capital replacement costs for the village for the next 10 years.
Our quantity surveyor audits all the buildings and structures owned by the scheme operator, such as communal facilities, amenities and the accommodation units, plant, machinery and equipment, roads, paths, drainage, sewerage mains and landscaping. For each capital item, the likely cost and frequency of replacement are determined, and the data is displayed in tabular form for the report.

Replacing a village stand-by electricity generator is anticipated to be necessary in 3 years time at a cost currently estimated at $60,000. The contribution amount for the capital replacement fund in the budget for the current financial year must therefore include the annual proportional share for its replacement, i.e. $60,000 divided by three years equals $20,000. Next year, the estimated cost has increased to $68,000 and so the second year amount will be $24,000. The estimated cost in the third year is $70,000, so with the $44,000 accumulated, a further $26,000 is necessary to meet the cost.

Replacing a capital item cost example

The scheme operator must decide the amount to be held in the capital replacement fund for the village (the capital replacement reserve) having regard to the fund’s purpose, and the quantity surveyor’s report, which must be updated annually. In having regard to the quantity surveyor’s report, the scheme operator must use the scheme operator’s best endeavours to implement the quantity surveyor’s recommendations in the context of the objects of the Retirement Villages Act; and any circumstances relevant to the retirement village that apparently was not considered by the quantity surveyor.

The scheme operator may adjust the capital replacement fund contribution annually to ensure the capital replacement reserve is reached within five years.

Capital Replacement Fund Budget [s 93]

The scheme operator must adopt a budget (a capital replacement fund budget) for each financial year for the capital replacement fund.

The capital replacement fund budget must allow for raising a reasonable capital amount to—

  • provide for necessary and reasonable spending from the capital replacement fund for the financial year
  • reserve an appropriate proportional share of amounts necessary to be accumulated to meet anticipated major expenditure over at least the next 9 years after the financial year

The capital replacement fund budget must fix the amount to be raised by way of capital replacement fund contribution to cover the capital amount.

If the amount a scheme operator must spend on capital replacement at any time is more than the amount held in the capital replacement fund, the operator must pay the difference between the actual amount to be spent and the amount held in the capital replacement fund. Note however, the scheme operator must never pay into the capital replacement fund any amounts which are properly payable into the maintenance reserve fund, or any other fund.

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