What is a sinking fund?
A body corporate’s sinking fund is effectively a deposit which exists to allow a body corporate 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. 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:
Body corporates 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.
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 9 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 removed 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.
Bodies corporate can ask an independent company such as Star BMS to prepare a sinking fund forecast for it, or have a committee or lot owner estimate the likely spending requirements.
If your strata scheme is looking for advice on what a sinking fund is, and how best to manage it, click here to 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.