Sinking Fund

Sinking Fund Plans

The purpose of this report is to provide an independent analysis of the requirements for expenditure and contributions towards the Sinking Fund of the complex with a 15 year projection.  A sinking fund is set up by the Body Corporate / Owners Corporation to cover the costs of future capital expenses, which include for example, painting the building, driveway refurbishment, replacement of common property items like carpets, roofing and guttering and lift overhauls.

A sinking fund forecast report provides the committee with budget information as follows;

Identifies the common property items which are likely to require maintenance work and/or replacement
Estimates the year in which the maintenance is likely to occur
Estimates the cost of the maintenance in the year of occurrence
Calculates the sinking fund levy contributions necessary to meet these costs after taking into account factors such as accumulated bank interest, income tax and GST.

Most maintenance expenses accrue over time. Using a sinking fund forecast report to set the sinking fund levies ensures each owner pays a fair share of the costs attributable to their usage of the building and reduces the risk of special levies being required.

What Happens if the Levies Are Set Too Low?

The person who sells first before major expenditure effectively steals from the Owner’s Corporation or Body Corporate.

Buildings and complexes are generally described as being inanimate objects. But we at QBM who are passionate about buildings think that they can almost be described as “living and breathing” structures.

Building change over time and are affected by age, internal stresses within the building, the elements and usage. It is these changes that can result in significant deterioration to the complex and the buildings making up the complex.

Each year, owners of a complex are effectively using part of the life of the building’s components as all components will require upgrade or replacement over time. Thus each owner should pay their fair share of the usage of the complex.

When levies are set too low, owners are not paying for their usage of the complex. Thus when the time comes for upgrades and replacement, the then current owners have to pay for the past usage by previous owners.

This is unfair and can be classed as “legally stealing”.

The Sinking Fund Report

A correctly prepared Sinking Fund Plan will identify the expected maintenance and upgrade works required over time to ensure the complex does not deteriorate.

A deteriorated complex is much less valuable than a complex in peak condition.

The report will provide not only the expected maintenance and upgrades works, but will give reasonable estimates of the likely cost of such works. The total cost of such works would then be divided by the number of Lot Entitlements to give the proposed levies due from each lot owner.

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New South Wales

10-year sinking fund plans

From July 2009, all strata schemes are required by law to have a 10‑year sinking fund plan in place (Section 75A of the Strata Schemes Management Act 1996).

This means that owner’s corporations must plan how they will repair and maintain common property and raise sufficient funds to cover the costs. The amount required for the 10‑year plan will vary between schemes, for instance, newer schemes may require relatively less money than the plans for older schemes with more repair work due. Each sinking fund plan should reflect the individual needs of its scheme.

Queensland

The Act states that the Sinking Fund Budget must allow for raising a reasonable capital amount to provide for both the necessary and reasonable spending from the sinking fund for the financial year and also to reserve an appropriate proportional share of amounts necessary to be accumulated meeting anticipated major expenditure over, at least the next 9 years.

The Body Corporate and Community Management Bill 1997 became law in Queensland on 13 July 1997. This legislation makes it mandatory for every body corporate to prepare a sinking fund forecast as a basis for their annual sinking fund budget. The forecast must be for a minimum of ten years. It means that all Queensland strata title buildings will now have sufficient funds for good maintenance management.

The Sinking Fund Budget is based on estimates of spending of a capital nature or non-recurrent nature and must allow for raising the necessary capital amount to provide necessary and reasonable spending for major works in the present financial year and create a reserve for anticipated major expenditure for the next 9 years. (total of 10 years)

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