Legislation makes it mandatory for every Body Corporate and Owner’s Corporation to prepare a Sinking Fund Forecast. This is called a Capital Works Fund in New South Wales. The Sinking Fund Forecast is based on estimates of spending of a capital nature or non-recurrent nature.
The Sinking Fund forecast must allow for raising the necessary capital amount, to provide necessary and reasonable spending for major works in the present financial year; create a reserve for anticipated major expenditure for the next 10 years.
The sinking fund forecast must be for a minimum of 10 years and it is a statutory requirement that the provisioning be done properly. This is where QBM can play a vital role.
It is a requirement of the Act that any Sinking Fund Forecast be kept refreshed and current, so it will be a representative of the state and status of the building and all common property.
If the Sinking Fund forcecast has not been updated for a number of years, it will almost certainly not be representative of the funding needs of your complex. So it is likely that the Body Corporate will be under-funding the Sinking Fund, ie. Not saving enough. The consequences of this could be serious.
You can meet every Sinking Fund Forecast requirement with the help of QBM. We will work with you and your committee to devise a forecast that covers all your needs.
The benefits of long term Sinking / Capital Works Fund
Recent changes to law as they affect Bodies Corporate / Owner’s Corporations mean that strata owners and managers need to have a 10-year sinking fund plan in place. This means that owner’s 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.
A Sinking Fund Forecast should be prepared by a suitably qualified professional, so an accurate estimate can be made of future anticipated expenditure.
This assessment can then be used to prepare a detailed Preventative Maintenance Program to suit the building(s) in question. It will also advise you what sinking fund levies should be paid to ensure sufficient funds are available when work is needed. The usual time frame for these assessments covers a 10-year period with a review to be done every 5 years.
The Sinking Fund Assessment is similar to a Building Audit but should also be prepared by a suitably qualified professional. Unlike the Sinking Fund Assessment, the Building Audit provides a report on the present condition of the building and advises on any necessary repairs or defects needing attention.
Most building owners and managers will use the findings in the report to provide information to the Sinking Fund Assessment.
Bodie’s Corporate and Owners Corporations can put the 10-year plan together themselves or engage outside experts or firms specialising 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.
There are a series of steps that are repeated during each 10-year cycle following the development of the first 10-year plan. For example in the first year, the owner’s corporation appoints someone to prepare the sinking fund. The plan is presented to the owners and is to be used as the basis for determining sinking fund contributions. Meanwhile in subsequent years, the sinking fund forecast is to be used as the basis for determining contributions (levies).
At the 10-year stage the owner’s corporation appoints someone to prepare a new 10-year sinking fund plan for finalisation by the AGM the following year.
Common property is affected in the assessment. A comprehensive list of all the common property of the scheme is usually the first step. This would normally include anything from intercoms, lighting, 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, shade cloth, retaining walls, or television antennas and other items such as security systems where applicable.
In order to establish a preventative maintenance plan, mangers would plan in terms of time frames for:
- repair work
- cyclical maintenance and
- Replacement for items.
QBM can assist in assessing the cost of replacing items; in any case the Body Corporate or Owner’s Corporation would decide how they want to raise contributions from owners, either through normal levies or if scheduled, accelerated contributions ahead of any planned maintenance. Alternatively, owners may agree to wait and raise a large special levy or borrow money when major work needs to be done.
The sinking fund forecast would need to 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.
As a calculation, the total sinking fund amount is divided by the total number of unit entitlements, and then this amount is multiplied by each owner’s unit entitlements, in the normal fashion. Alternatively, the Body Corporate or Owner’s Corporation can decide, by unanimous resolution only, to distribute any money in its sinking fund to lot owners, if the owner’s corporation considers that the money is not required for the purposes of the fund.
What you need to know
- The Sinking Fund Forecast is based on estimates of spending of a capital nature or non-recurrent nature and must allow for raising the necessary capital amount to provide necessary and reasonable spending for major works in the present financial year and create a reserve for anticipated major expenditure for the next 9 years—10 years in total.
- It’s advisable to conduct a yearly inspection of the building and common property, to determine approximately when the maintenance needs to be carried out.
All relevant items that will require replacement in the future need to be included.
- The age, location, construction and the past maintenance program of the building need to be taken into consideration. The sinking fund forecast should take into account the existing bank balance, interest earned, tax payable, estimated replacement cost, allowance for inflation, recommended years of life and yearly contributions.
- It is necessary to ensure that money is available when required whilst at the same time ensuring that the fund balance does not become excessively high. Contributions, as well as the budget, should be adjusted up or down depending on the needs.