One of the benefits of living in a Body Corporate/Owners Corporation is that everyone contributes to the future upkeep of the property.
This is managed by a regular payment of contributions.
- In Queensland, it is called a Sinking Fund;
- In New South Wales, it is called a Capital Works Fund;
- In Victoria, it is called a Maintenance Fund.
(For the purposes of this article we will use the term ‘sinking fund’)
So, what can the money in a sinking fund be used for?
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. In a large strata scheme, 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:
- Owners’ contributions to the sinking fund;
- Interest received from the fund’s investments; and
- Money from insurance pay outs (for major or capital items which have been destroyed or damaged)
The sinking fund levy (owner’s contribution), is often administered by a Community Management company such as SSKB and the funds are kept in the Body Corporate bank account.
Bodies Corporate 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. Money cannot be transferred between the sinking fund and the administrative fund, and vice versa.
Sinking Fund Budget
Every financial year, Body Corporate committees must prepare a sinking fund budget. This is to ensure the sinking fund has sufficient finances to provide necessary and reasonable spending for the upcoming financial year, on the items listed above. This is also necessary to ensure an amount is reserved to cover likely spending for at least 10 years after the current financial year. 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 remove the possibility of this occurring.
A proposed sinking fund budget must accompany the Annual General Meeting notice when it is distributed to lot owners every year. After the sinking fund budget has been prepared, a committee is able to determine what amount will be levied to lot owners for the sinking fund levy.
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.
Plan for the future
Planning begins with a Sinking Fund forecast which identifies these big-ticket items, and:
- Their current condition;
- The estimated time before replacement or major repairs are necessary; and
- The estimated cost to replace or repair at that time.
In Queensland, a Body Corporate needs to budget for major capital spending for the current financial year and the next 9 years. Considering the involved process, it’s not a surprise that Body Corporate Committees prefer to invest in a qualified Quantity Surveyor like Star BMS to prepare 15 year Sinking Fund forecasts to give committees the broadest possible overview of future expenses.