Why do you need a sinking fund?

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.

This is done through a regular drip of savings.

  • In Queensland, it is called a Sinking Fund;
  • In New South Wales, it is called a CapEx (Capital Expenditure) Fund;
  • In Victoria, it is called a Maintenance Fund.

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:

  • 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 kept and 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 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 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 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, 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, talk to StarBMS.  We can provide you with expert advice and tailor it to the details of your individual scheme to ensure you get the best outcome.

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.

Our experts not only have the experience to identify and accurately calculate the costs of the future common expenses they 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.

Why you can trust Star BMS

Star Building Management Services (Star BMS) is a facilities management company established in 1992 to meet the growing need for quality asset management in the Body Corporate sector.

For more than two decades, Star BMS has earned a reputation for providing superior service to our clients.

Our services include:

  • Building Management and Maintenance Systems;
  • Common Property Condition Reports;
  • Building Management Statements;
  • Insurance Valuation;
  • Sinking Fund Forecast;
  • Fire Safety Adviser Appointment;
  • Occupiers Statement;
  • General Safety and Building Fire Safety Compliance report;
  • Cleaning;
  • Fire Evacuation Signs;
  • External Cladding Champion.

To improve the value of your investment, click here to contact StarBMS today.

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