Sinking fund

Residential strata - What is a sinking fund?

While different states have different rules, the definition is still pretty much the same wherever you own a strata unit. Some states and strata organisations are beginning to call them capital works fund or maintenance funds to make their meaning a bit clearer.

Why are sinking funds needed?

Firstly, a number of states and territories actually require them by law. But from a practical perspective, they’re also required to make sure that an owners’ corporation/body corporate has enough money on hand to cover emergency repairs and necessary ongoing maintenance. Without an adequate sinking fund, the owners’ corporation may need to raise a special levy every time something needed to be fixed. Not only would this be time consuming and inefficient, but it also relies on each title-holder paying the levy in full and immediately – and given that no one likes unexpected costs, this can be difficult to achieve.

The sinking fund is a bit like an insurance policy, to ensure there are adequate funds to keep the building well maintained.

Well why doesn’t insurance cover it then?

Insurance is designed to cover unexpected events life fire, accidental damage and liability. A good strata building insurance policy will pay for repairs, but there is usually an excess and it takes time to process a claim.,

What’s more, building insurance does not cover the ongoing repairs and maintenance costs of a property such as exterior painting, new fencing, replacing carpets in common areas, replacing old roofs and guttering, rewiring, fixing up driveways, gates and car parking, etc. All of these will eventually be required, and they’re paid for out of the sinking fund.

Always keep in mind that the sinking fund is not designed to be used for ongoing costs such as lawn mowing, utility bills, building manager’s salary and minor repairs.

How much should go into a sinking fund?

(in other states they’re optional). These plans forecast what the property’s are likely to be over time, and how much will be required to cover them. They cover things like

Roofs and balconies
Doors and windows
Lifts
Shared laundries and bin rooms
Security systems
Sewage
Car parks
Exterior wall painting
Fences

The total needed for the sinking fund is then as an annual fee, which is paid on a quarterly basis as part of the strata levies, with owners of larger apartments paying more.

Here’s an example of how it works. The strata committee of a largish apartment complex might decide that, over the next ten years, it’s likely the entry lobby will need repainting, some roof repairs will need to be done, the back fence will probably need replacing and the driveway resurfaced. The total cost is estimated to be around $300,000, which is $30,000 per year over ten years. If all the apartments are the same size then each of the thirty owners would pay $1,000 to the sinking fund or capital works fund each year.

Even if 10-year plans are optional (or not enforced) they’re useful to ensure owners aren’t paying too much or not enough.

How do you predict the future?

Here’s a tip – it’s difficult. Many owners’ corporations turn to professionals to make an assessment of what will need to be done and how much it’s likely to cost. External assessors are highly recommended because Capital Works Plan legislation in a number of states, is becoming tighter and more onerous, particularly in respect to what needs to be determined and included. If you wish to do this yourself the information is normally on the office of fair trading site for your state.

Finally…

While a sinking fund can seem like just an extra expense, it can actually save you money – or at least a nasty surprise – down the track. And if you are renting out your unit, payments made to a general purpose sinking fund (but not a special purpose levy) may be claimed as a tax deduction.

“Payments you make to body corporate administration funds and general purpose sinking funds are considered to be payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time you incur them. However, if the body corporate requires you to make payments to a special purpose fund to pay for particular capital expenditure, these levies are not deductible.”
Body corporate fees and charges | Australian Taxation Office

Then look at the things on your property that are most likely to require some attention (i.e. financial outlay) over that period, such as:

Roofs and guttering
Driveways and car parking
Fences
Exterior wall painting
Common areas and lobbies
Lifts and stairwells
Windows and external doors
Balconies and balustrades
Capital works to common outdoor areas
Shared facilities such as laundries and bin rooms
Sewer connections to the building
Common area security systems and lighting