Sinking Fund Forecasts & Capital Works Plans

A ‘Sinking Fund’ is a bank account as part of the strata in a unit development, set up to cover the costs of future capital expenses.

This serves as a roadmap for property owners, managers, or bodies corporate to budget and schedule necessary works, ensuring the property remains safe, functional, and compliant with regulatory standards.

It helps in prioritizing expenditures and managing resources efficiently to maintain the property's value and sustainability over time.

MCG's Sinking Fund Forecast (also known as Capital Works Plan) report identifies the costs of these repairs/replacements and forecasts these costs for the next 15 years, allowing the Body Corp to ensure money is available in the Sinking Fund when the repairs are estimated to occur.

FREQUENTLY ASKED QUESTIONS

WHAT IS A STRATA TITLE?

A Strata Title is a system for handling the legal ownership of a 'portion' of a building or structure. These portions can be made up of many different styles ranging from units, lots, townhouses, villas, commercial offices, factories, retail shops, etc.

Strata titles exist in many different types of developments, including;

  • Residential;
  • Commercial;
  • Retail;
  • Mixed use - i.e. retail and/or commercial and/or residential;
  • Serviced apartments;
  • Retirement villages;
  • Caravan parks;
  • Resorts

This is something that must be determined from the beginning. The NSW Dept of Fair Trading states that the Owners Corporation must repair Common Property whilst owners are responsible for any repairs within their unit or 'lot'.

WHAT IS USUALLY CONSIDERED COMMON PROPERTY?

Common Property is the area and facilities of the property that have shared use by all tenants or occupants. Examples of some typical ‘common area’ items are:

  • Roof replacement;
  • Concrete driveways and paths;
  • Guttering replacement;
  • Fire safety equipment;
  • Lift upgrades;
  • Balcony repairs;
  • Building facade repairs;
  • Cracking to walls and subsidence;
  • Pool facilities;
  • Carpet replacement;
  • Common property painting and maintenance;
  • Rendering the building's façade;
  • Foyer areas;
  • Landscaping (fencing, plants, etc);

 

Ultimately, it is the responsibility of the Owners Corporation to look after all aspects of the Common Property of the Strata Scheme.

HOW CAN I ENSURE THAT SUFFICIENT FUNDS ARE RETAINED?

In past years, it was very common for Owners Corporations to avoid looking to the future or minimising their sinking funds to the eventual detriment of all the owners in the scheme.

Therefore the outcome was that when the time would come when something had to be either replaced or repaired, there were no funds in the Sinking Fund to do the job.  The Owners Corporation therefore had no other option but to raise a levy asking for money to fix whatever had to be fixed.

Now, when this situation occurs there are a couple of options open to the Owners Corporation including:

 

  • Don't do anything and wait until repairs are required, then raise the funds via a ‘passing the hat around’;

  • Applying for a Strata Finance loan or raising a special levy(not recommended); or

  • Implement a Sinking Fund Levy (Sinking Fund Forecast) so the works can be completed when required. (recommended).

TYPES OF STRATA LEVIES

Strata Schemes should impose a regular strata levy, recommended to be collected quarterly, on all the lot owners. The money collected is deposited into the strata scheme's trust account and is then used to fund the running and maintaining of the strata scheme. Strata Levies must be determined and administered by the Owners Corporation with levy notices being issued on a regular basis.

There are three types of Strata Levies:

    1. Administrative Fund Levies - to cover the day-to-day running expenses;
    2. Sinking Fund Levies - for long term repairs and maintenance;
    3. Special Levies - for all those unexpected expenses where no funds were allocated.

SINKING FUND LEVIES

The Sinking Fund, also under the control of the Owners Corporation, is essentially a large capital expenditure fund that pays for both expected (long term) and unexpected replacement, repairs and maintenance.

Working out just how much to allocate towards these unexpected events is not an easy task and this is where the help of some experienced and knowledgeable people is required to ensure the Sinking Fund does what it's supposed to.

It is recommended that Quantity Surveyors provide a detailed cost account and lifecycle for the forecast replacement of the item.

By handling the sinking fund properly, the owners of the scheme may never have to face the dreaded Special Levy, since sufficient funds should always be available.

 

It is NSW law to have a Sinking Fund Forecast!

 

Thankfully, due to increasing pressure from a number of areas, legislation was passed to 'phase in' mandatory 10-year sinking fund plans beginning from July, 2006 for all NSW Strata Schemes. Essentially all NSW Owners Corporations now have to have 10-year sinking fund plans done for their Strata Schemes in an effort to eliminate the problems of insufficient funds for capital works.

By now, every scheme in NSW should have done their 10-year plans with many now having to revisit these (and amend them if required) as per the legislation.

 

You can read the details about this requirement in the NSW Strata Schemes Management Act 1996: Schedule 75A - Owners Corporation to prepare 10-year sinking fund plans.

Talk to one of our sinking fund experts today on
1300 795 170 to ensure you have a professional
report supporting your development.