What is a sinking fund?
An owners corporation’s sinking fund is effectively a deposit which exists to allow an OC to pay for repairs and maintenance of a building.
The money in a sinking fund can be spent on several different things. Firstly, it can be spent on anticipated capital expenditure, or non-recurrent items. This often includes large or one-off items, such as painting the building or major structural repairs to common property. The sinking fund can also be used to replace major capital items in a scheme. This might include items such as common property fences, or carpets in a lobby. Sinking funds can then also be spent on any other reasonable expenses which should be reasonably met from capital, such as pool furniture.
The sinking fund is raised through three main avenues:
The sinking fund levy (owner’s contribution), is often kept and administered by a Community Management company such as SSKB, on behalf of an owners corporation.
Owners corporations are also required to raise an administration fund. This is used for regular maintenance of common property, such as gardens, as well as insurance charges, and administrative expenses – including secretarial fees and postage. In New South Wales, the owners corporation can transfer funds between the account for the administration fund and the sinking fund if necessary. This transfer occurs with the proviso that within three months, the owners corporation must make a resolution as to how these funds will be repaid.
A 10-year sinking fund plan must be created at the first Annual General Meeting (AGM) of the owners corporation and is to be completed by the second AGM. This plan must be reviewed, and if necessary adjusted, by no later than the fifth AGM of the owners corporation. The plan must then be reviewed every 5 years after this. The aim of having a 10-year sinking fund plan is to assist in building up sufficient financial reserves so expensive capital expenditure can be paid off when if required. Building up financial funds reduces the likelihood of having to ask lot owners to make a large, one-off payment to sinking fund levies – although it does not totally removed the possibility of this occurring.
Payments from the sinking fund for repairs or major expenditure can only be made if there is either a written request for payment in the form of a tax invoice, or written evidence of payment, including a receipt. All payments from the sinking fund must be made from the financial institution account.
Owners corporations can ask an independent company such as Star BMS to prepare a sinking fund forecast for it.
If your strata scheme is looking for advice on what a sinking fund is, and how best to manage it, talk to SSKB. We can provide you with expert advice and tailor it to the details of your individual scheme to ensure you get the best outcome.