The Need for a Healthy Sinking Fund Balance

sfDo you have $20,000 to immediately contribute to your Strata Scheme for major works?

No?

Well without a healthy Sinking Fund balance and regular contributions, you may be forced into paying a Special Levy.

Each of these lot owners were required to find $20,000 to fund this work because their Sinking Fund was not adequate. 

 

Special Levies

A Strata committee can levy each lot owner an amount to fund urgent or major works outside the Sinking Fund. This is called a “Special Levy”.

There are a number of problems with Special Levies that put a lot owner at a financial disadvantage.

  1. You may not have the money.
    1. Too bad. You still need to pay the levy. Get a loan or sell something.
  2. If you are an investor, Special Levies are NOT immediately tax deductable.
    1. See the extract from tax office ruling NAT1729.
    2. Special Levies need to be capitalised. That is, you deduct it over 25 – 40 years.
    3. You will still have the deduction when you sell the property.
  3. Your regular Sinking Fund contributions still need to be paid.

Sinking Funds

A Sinking Fund needs to be prepared at least each 5 years and run for 10 years.

The Sinking Fund, if prepared correctly will identify all the expected expenditure to keep the complex is a safe and aesthetically pleasing state where all upgrade and maintenance works are adequately funded over the period of the report.

Developers and agents regularly advertise lots for sale with “low strata fees”. This is a fallacy as every complex requires a certain amount of expenditure, otherwise it will deteriorate. When you see this statement, just be aware that in effect, all it is saying is “we are keeping the levies low now until we sell the lots and the future owners can worry about not having enough money to pay for repairs”.

Unfortunately, some committee members also have this attitude, especially if they intend to sell in a short time. What they want is to pay as little as possible now and let future and long term owners be hit with Special Levies. They only care about making money.

Sinking Fund v’s Special Levy

A correctly prepared Sinking Fund has so many benefits over a Special Levy; it is a surprise that any one even considers imposing one in the first place.

A correctly prepared Sinking Fund:

  • Levies are fully and immediately tax deductable
  • Expenditure is spread over the life of the complex
  • Levies are spread over the life of the items to be repaired, replaced or upgraded
  • There is no Shock with receiving a large invoice for a Special Levy
  • All lot owners pay the correct amount as they use the complex
  • Future and long term owners are not hit with all the costs while short term owners flee without paying their fair share

Australian Taxation Office article NAT 1729, extract.

Body corporate fees and charges 

You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.

Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or they may be applied to a special purpose fund.

Payments you make to body corporate administration funds and general purpose sinking funds are considered to be payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time you incur them. However, if the body corporate requires you to make payments to a special purpose fund to pay for particular capital expenditure, these levies are not deductible. Similarly, if the body corporate levies a special contribution for major capital expenses to be paid out of the general purpose sinking fund, you will not be entitled to a deduction for this special contribution amount. This is because payments to cover the cost of capital improvements or repairs of a capital nature are not deductible; see Repairs and maintenance and Taxation Ruling TR 97/23 . You may be able to claim a capital works deduction for the cost of capital improvements or repairs of a capital nature once the cost has been charged to either the special purpose fund or, if a special contribution has been levied, the general purpose sinking fund; see Capital works deductions.

A general purpose sinking fund is one established to cover a variety of unspecified expenses (some of which may be capital expenses) that are likely to be incurred by the body corporate in maintaining the common property (for example, painting of the common property, repairing or replacing fixtures and fittings of the common property). A special purpose fund is one that is established to cover a specified, generally significant, expense which is not covered by ongoing contributions to a general purpose sinking fund. Most special purpose funds are established to cover costs of capital improvement to the common property.

If the body corporate fees and charges you incur are for things like the maintenance of gardens, deductible repairs and building insurance, you cannot also claim deductions for these as part of other expenses. For example, you cannot claim a separate deduction for garden maintenance if that expense is already included in body corporate fees and charges.

ABOUT QBM (QUALITY BUILDING MANAGEMENT)

Quality Building Management (QBM) formed by Donald Pitt, has been an active professional within the Building and Strata Industries since 1970.

QBM have completed 1,000’s of Sinking Funds to numerous Strata complexes, and have been successful in indentifying faults and all required works over a 40 year period to ensure all costs are captured so that levies are set fairly and realistically. And QBM always inspects the complex by personal visits to the complex.

Specialising in everything to keep Commercial, Industrial and Residential Complexes safe and legally compliant, QBM provide the full range of Asbestos, Fire  and Building inspections, reporting and training services for Property Owners and Managers, as well as Real Estate Agents.

By doing all the required services and investing in systems and our people, we can confidently give cost saving guarantees where you will save money.

 

The information provided in this article is of a general nature only and does not represent nor is it intended to be advice of a personal nature or any particular nature. Quality Building Management Pty Ltd strongly suggests that no person should specifically act upon any information supplied in this article, but should obtain our professional advice concerning your specific issue or personal circumstances.