The Statement of adjustments are the calculation of who owes what for rates and levies as at the day of settlement. The are used in property conveyancing and prepared close to settlement.
The Statement of Adjustments can be tricky to understand especially if you are buying or selling a property for the first time.
The first principle to understand is that all outstanding rates, fees, levies and taxes “go with” the property. If there are outstanding rates that debt remains with the property and is transferred to the new owner.
The rates and levies need to get “adjusted” at settlement so that vendor and purchaser each pay their share of the rates/levies etc.
The second important principle to understand is that all the council rates and outstanding fees for owners corporation etc must be paid up in full at settlement. This is a legal requirement even if they are not normally due.
We start by calculating the daily rate of property rates, taxes and fees and how many days each party owns the property for.
There is important assumption in the statement of adjustments – We normally calculate on a “paid basis”.
We assume that the vendor has paid all the rates and taxes. This is may not be the case, but more on that further down.
Firstly, we work out the daily rate for the rates. We then multiply this by the days the purchaser owns the property for in that period.
In a simple example – if the Vendor owned the property for half the year, they would pay for their 183 days and the purchaser would pay for the other half of the year. ie 182 days.
This would be calculated on the Statement of Adjustment as:
|Council Rates||$1000 per annum|
|Purchaser Allows*||182 days at $2.739||$498.63|
*The purchaser is normally always allowing (or paying) the vendor the money in this section as we have assumed that the rates are paid.
It would look simpler if all the authorities had the same dates and time periods, but they don’t. So, it can look a little messy.
If you look at each line item it will have the dates and amount for each rating period.
For a water bill this may have a few different items such as parks and drainage. Some are annual charges and others are quarterly charges. An owners corporation fees might be monthly, quarterly or even annually.
This is typically done for the Council Rates, Water Rates, Owners Corporations and Land Tax. There can be other fees noted such as discharge of mortgage fee.
|Continuing with our simple example we have the:|
|Property Purchase Price||$300,000|
|Amount due to the Vendor at settlement||$270,498.63|
Since we assumed that the vendor paid all the rates we need to check they HAVE actually paid all the rates.
If they haven’t paid them we need to get that money back from the Vendor. Any money for outstanding rates needs to come out of the Vendor’s money owing to them.
We deduct this directly from the vendor.
Once these outstanding balances have been paid the vendor directs us on how to pay the balance of monies to them.
|Amount Due to the vendor at settlement:||$270,496.86|
|Melbourne City Council||$1,000.00|
|Balance owing to Vendor||$267,500.00 **|
**this is vendor money and they can direct this how they choose. They will often pay their bank; their conveyancing lawyer and take the rest of the monies themselves. If they are buying another property, they may make money out for their next purchase.
This is all done so that at the day of settlement there are no rates, taxes or fees owing against the property.
The vendor has paid their share of the rates and the rates are now all paid up until the new rating period.
After all the rates and outgoings are paid the Vendor can tell us how to divide the settlement funds due to them ($269,498.63 in the example below).
This is a final version of what the simple Statement of Adjustment would look like…
It is quite unfortunate for home owners that they also have to pay for land tax even if they are going to live in the property. This can be significant amount if you are buying a property that is subject to land tax. You won’t have to pay land tax for the subsequent years as you are living in the property, but you do have to pay a share for the year in which you first buy the property.
Land tax is calculated on the calendar year in Victoria and using the lower single holding basis figure.
At Conveyancing Depot we make sure our clients are well represented and understand the conveyancing process.
Disclaimer: This article has been prepared for general information purposes and may not apply to your situation. This information should not be relied upon for legal, tax or accounting advice. Your individual circumstances will alter any legal advice given. The views expressed may not reflect the opinions, views or values of Conveyancing Depot and belong solely to the author of the content. © Conveyancing Depot Pty Ltd.
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Jessica is an experienced conveyancing lawyer and has enjoyed helping many clients buy and sell...