"> Why Do You Need a Sinking Fund? - SSKB Strata Managers

Why Do You Need a Sinking Fund?

Why 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.

This is done through regular savings.

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 accumulated funds, such as pool furniture, BBQ’s, replacement roller doors to garage etc.

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, on behalf of a Body Corporate.

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 electricity, repairs and maintenance, and third party service providers.  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.  This is also necessary to ensure an amount is reserved to cover likely future spending for at least 9 years after the current financial year.  Building up funds reduces the likelihood of having to ask lot Owners to make a large, one-off payment to sinking fund levies via a special levy– 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.

Bodies Corporate can ask an independent company such as Star BMS to prepare a sinking fund forecast, or have a Committee or lot Owner estimate the likely spending requirements.

Your SSKB Community Manager has direct access to our subsidiary business StarBMS. If your strata scheme is looking for advice on sinking funds, talk to your Community Manager or contact StarBMS directly.

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. SSKB has direct access to Star BMS who can arrange a 15 year Sinking Fund Forecast to give Committees the broadest possible overview of future expenses.

Our experts not only have the experience to identify and accurately calculate the costs of the future common area assets but also provide a program that details when these works ought to be scheduled, what works are required in which sequence so that later works do not damage earlier repairs.

To improve the value of your investment, it is imperative that your Sinking Fund Forecast accurately estimates future capital expenditure which, when adopted at the AGM will ensure the Body Corporate will have the funds that are required to maintain your building. Click here to make the switch to SSKB today.

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