When it comes to sinking funds, we have heard it all. From “why do I need a sinking fund; my building isn’t sinking” and I guess you can imagine the rest!
What is a Sinking Fund:
A Body Corporate sinking fund (SFF) is effectively a deposit which exists to allow a Body Corporate to pay for repairs and maintenance of a building.
Who is the sinking fund forecast prepared by and how is it prepared?
A quantity surveyor typically prepares the sinking fund forecast.
Usually, a SFF includes an expected timeframe for the capital improvement and replacements for the scheme. An example is a pool resurfacing in 5 years. The forecast will anticipate costs, its timeframes, inflation and any potential increases to produce a cash-flow recommendation.
Why do you need a sinking fund?
One of the benefits of living in a Body Corporate is the fact that everyone contributes to the future upkeep of the property.
Achieving this requires maintaining a consistent habit of saving.
What can a sinking fund be spent on?
You can spend the money in a sinking fund on several different things. Firstly, you can spend the allocated funds in a sinking fund on anticipated capital expenditure, or non-recurrent items. In a strata scheme, this often includes large or one-off items, such as painting the external building or major structural repairs to common property. You can utilize your sinking fund to replace major capital items within a scheme. This might include items such as common property fences, or carpets in a lobby. Sinking funds can also be allocated towards other reasonable expenses, such as the purchase of pool furniture, for example.
How is the sinking fund raised?
The sinking fund is raised through three main avenues:
- Owners’ contributions to the sinking fund
- Interest received from the fund’s investments eg. Term deposits
A Community Management company, such as SSKB, often administers the sinking fund levy (owner’s contribution) on behalf of a Body Corporate.
Body Corporates must also raise an administration fund as a requirement. This is used for regular maintenance of common property, such as gardens, as well as insurance charges, and administrative expenses – including electricity, repairs and maintenance, and third-party service providers. Money cannot be transferred between the sinking fund and the administrative fund, and vice versa.
How long should the Body Corporate forecast for?
As a rule of thumb there is a 10-year rule.
As an absolute minimum the SFF should be forecasting to cover 10 years’ worth of anticipated costs. This allows the Body Corporate owners to identify, plan and save for these future expenses.
When should the sinking fund forecast be reviewed?
Typically, a review of sinking funds occurs every 5 years. A quantity surveyor will prepare a 15-year forecast including 15 years of annual budgets (which includes 15 years of recommended contributions to be collected) and 15-year projection.
When should a sinking fund Forecast be reviewed early?
A sinking fund may undergo early review for two reasons. These reasons are:
1. After a cost variance on major expenditure
Unsurprisingly, the expected cost of a project can deviate from the sinking fund forecast anticipated budget. A quantity surveyor will provide an estimation to set the SFF however project costs can change as they are variable depending on costs and expenses fluctuating. In the event of project costs exceeding the budget, it is possible to utilize funds from the sinking fund allocated for other projects. This can negatively impact sinking fund balance.
Any fluctuations in budget can throw the sinking fund off track for remaining period of the forecast.
To maintain the utmost accuracy of the Sinking Fund Forecast (SFF), the quantity surveyor can conduct a review by considering a more realistic project cost, followed by the recalculation of levies. This is called a ‘review’ of the SFF instead a new forecast. The report typically carries a lower price compared to the full report.
2. When Committee deems necessary
A Committee can choose to review or replace a SFF at any time depending on Committee spending limit. Although it can seem to be an unnecessary expense economic with natural and economic turbulence it can be a highly beneficial.
Where can I find the Legislation on Body Corporate Sinking Fund Forecast?
QLD Legislation-
- Check out the legislation: https://www.qld.gov.au/law/housing-and-neighbours/body-corporate/finance-insurance/funds/sinking
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.
If you are not a client of SSKB and would like to see how easy it is to make the switch, click here to contact us for an obligation free consultation.
