SINKING FUNDS -
A sinking fund is set up by the owners
corporation to cover the costs of future capital expenses, which
include for example, painting the building, driveway refurbishment,
replacement of common property items like carpets, roofing and
guttering and lift overhauls.
10–year sinking fund
From July 2009, all
strata schemes are required by law to have a 10-year sinking fund plan
in place (Section 75A of the Strata Schemes Management Act 1996 ).
This means that
owners corporations must plan how they will repair and maintain common
property and raise sufficient funds to cover the costs. The amount
required for the 10-year plan will vary between schemes, for instance,
newer schemes may require relatively less money than the plans for
older schemes with more repair work due. Each sinking fund plan should
reflect the individual needs of its scheme.
The 10-year plan must be approved by
owners at an annual general meeting (AGM) and must be reviewed and
adjusted, if required, in the first five years.
Who develops the plan?
Owners corporations can put the 10-year plan together themselves or
engage outside experts to do the job for them. There are businesses
that specialise in preparing sinking fund plans but there is no
obligation on owners corporations to use them. Some owners corporations may feel they
have enough internal expertise to carry out the task. It is a matter of
choice for each scheme.
A guide to planning
are a series of steps that are repeated during each 10-year cycle
following the development of the first 10-year plan:
Developing your own
- AGM 1st year: the owners corporation appoints
someone to prepare the sinking fund plan. The plan must cover 10 years
from the date of the AGM and must be completed in time for the
- AGM 2nd year: the finalised plan is presented to the
owners and is to be used as the basis for determining sinking fund
- AGM 3rd and 4th years: the sinking fund plan is to be used as
the basis for determining contributions (levies).
- AGM 5th year: the sinking fund plan must be reviewed
and any necessary adjustments made. The sinking fund plan continues to
be used as the basis for determining contributions at the following
- AGM final year of
10-year plan: the owners corporation appoints
someone to prepare a new 10-year sinking fund plan for finalisation by
the AGM the following year.
following stages outline the steps an owners corporation might follow
to create a sinking fund plan.
What if my scheme
does not develop a plan?
- Step 1 –
List all common property
together a comprehensive list of all the common property of the scheme
which may include: letterbox, intercom, lighting, incinerators, hot
water services, grey water or water re-use systems, rainwater tanks,
waterproof membranes, lifts, paving, water features, swimming pools,
pool filters or heaters, gymnasiums and exercise equipment, gardens,
plants, pots, screens, pergolas, awnings, shadecloth, retaining walls,
or television antennas.
- Step 2 –
Estimate when repairs will be needed
- Decide on
a time-frame for repair work, cyclical maintenance and
replacement for items. Long-term owners or your strata manager may
know from previous experience how often repairs and maintenance are
needed. For repainting, for example, you could use guarantees or
information provided by previous tradesmen to get an idea of how long
the existing paintwork will last. Warranty statements and/or service
plans may help you estimate the working life of items such as automatic
garage doors, communal washing machines and lawnmowers.
- Step 3 –
- Investigate the cost of
replacing items. Refer to service plans, previous quotes and receipts
of items as a guide to the approximate costs of future repairs.
Obtaining current quotes and talking to tradespeople may also help.
While there are no
penalties in the legislation for owners corporations who do not develop
a 10-year plan, any owner can apply to the Consumer, Trader and Tenancy
Tribunal for an order instructing an owners corporation to meet its
obligations to develop a plan.
owners corporation can decide how they want to raise contributions from
owners, for example, yearly, half-yearly, quarterly or monthly. For
many strata residents, paying smaller amounts on a more frequent basis
may be more affordable than paying larger amounts on an annual basis.
Alternatively, owners may agree to wait and raise a large special levy
or borrow money when major work needs to be done.
In the end, the
financial implications of each way of raising funds should be carefully
considered by each owners corporation.
The sinking fund plan must show how
funds for particular expenses will be raised so all owners and
prospective buyers are aware of their future liabilities and can plan
their finances accordingly.
corporation must make a resolution at each AGM for an amount to be
credited into the sinking fund for the following 12 months and must
levy each owner for their contribution.
The total sinking fund amount is
divided by the total number of unit entitlements, then this amount is
multiplied by each owner’s unit entitlements. As an example, if an
owners corporation calculates that it needs $120,000 over 10 years,
then it would need to levy $12,000 for each year. To meet the $12,000
per year, contributions would need to be levied according to the unit
entitlement of each lot. If there were 20 lots in the scheme and each
had the same unit entitlement, each owner would be required to
contribute $600 per year to the sinking fund (note - these calculations
are of a general nature only).
Reimbursement of funds
corporation can decide, by unanimous resolution only, to distribute any
money in its sinking fund to lot owners, if the owners corporation
considers that the money is not required for the purposes of the
made by owners to the sinking fund are not refundable when an owner
later moves out of the strata scheme, even if the money has not yet
been spent on the item that the levies were intended to fund.
Owners corporations can
charge 10% interest for late payment of strata contributions.
However, the owners corporation can decide not to charge any interest
on late payments, or to offer a discount for early payment of
two-lot strata schemes may be exempt from the requirement to have a
sinking fund if the strata buildings are physically detached, no
buildings are situated outside the lots within the scheme, and the
owners corporation passes a unanimous vote that a sinking fund does not
need to be set up.