Do you find yourself unable to readily contribute $20,000 towards essential major works in your Strata Scheme? If so, it’s crucial to understand the importance of maintaining a healthy Sinking Fund balance by making regular contributions. Without this financial buffer, you may find yourself compelled to pay a Special Levy.

Consider the predicament faced by several owners who were unexpectedly tasked with sourcing $20,000 each to finance vital repairs. Regrettably, their Sinking Fund had not been adequately prepared for such expenses.

Read on as we delve into the necessity of a robust Sinking Fund balance and explore how it safeguards your finances when unforeseen Strata Scheme expenditures arise.

What Is A Special Levy?

A Strata committee can levy each lot owner an amount to fund urgent or major works outside the Sinking Fund. This is called a “Special Levy”.

There are a number of problems with Special Levies that put a lot of owners at a financial disadvantage:

1. You may not have the money.
   1. Regardless of your bank balance, you still need to pay the levy.
2. If you are an investor, Special Levies are NOT immediately tax deductible.
   1. See the extract from the tax office ruling NAT1729.
   2. Special Levies need to be capitalised. That is, you deduct it over 25 – 40 years.
   3. You will still have the deduction when you sell the property.
3. Your regular Sinking Fund contributions still need to be paid.

Sinking Funds

A healthy Sinking Fund needs to be prepared at least every 5 years and run for 10 years.

The Sinking Fund, if prepared correctly will identify all the expected expenditures to keep the complex in a safe and aesthetically pleasing state where all upgrade and maintenance works are adequately funded over the period of the report.

Developers and agents regularly advertise lots for sale with “low strata fees”. This is a fallacy as every complex requires a certain amount of expenditure, otherwise, it will deteriorate.

Sinking Fund v’s Special Levy

A correctly prepared and healthy Sinking Fund has so many benefits over a Special Levy such as:

• Levies are fully and immediately tax-deductible
• Expenditure is spread over the life of the complex
• Levies are spread over the life of the items to be repaired, replaced or upgraded
• There is no Shock with receiving a large invoice for a Special Levy
• All lot owners pay the correct amount as they use the complex
• Future and long-term owners are not hit with all the costs while short-term owners flee without paying their fair share.

An extract from the Australian Taxation Office article NAT 1729:

Body Corporate Fees and Charges 

You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.

Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or applied to a special purpose fund.

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 a particular capital expenditure, these levies are not deductible.

Similarly, if the body corporate levies a unique contribution for major capital expenses to be paid out of the general-purpose sinking fund, you will not be entitled to a deduction for this special contribution amount. This is because payments to cover the cost of capital improvements or repairs of a capital nature are not deductible; see Repairs and Maintenance and Taxation Ruling TR 97/23.

You may be able to claim a capital works deduction for the cost of capital improvements or repairs of a capital nature once the fee has been charged to either the special purpose fund or if a special contribution has been levied, the general-purpose sinking fund; see Capital works deductions.

General-Purpose Sinking Fund

A general-purpose sinking fund is one established to cover a variety of unspecified expenses (some of which may be capital expenses) that are likely to be incurred by the body corporate in maintaining the common property (for example, painting the common property, repairing or replacing fixtures and fittings of the common property).

Special-Purpose Fund

A special-purpose fund is one that is established to cover a specified, generally significant, expense that is not covered by ongoing contributions to a general-purpose sinking fund. Most special purpose funds are established to cover the costs of capital improvement to the common property.

If the body corporate fees and charges you incur are for things like the maintenance of gardens, deductible repairs, and building insurance, you cannot also claim deductions for these as part of other expenses. For example, you cannot claim a separate deduction for garden maintenance if that expense is already included in body corporate fees and charges.

Why Work With QBM?

Quality Building Management (QBM) formed by Donald Pitt, has been an active professional within the Building and Strata Industries since 1970.

QBM have completed 1,000’s healthy Sinking Funds to numerous Strata complexes and has been successful in identifying faults and all required work over a 40-year period to ensure all costs are captured so that levies are set fairly and realistically. And QBM always inspects the complex through personal visits.

Specialising in everything to keep Commercial, Industrial and Residential Complexes safe and legally compliant, QBM provides the full range of Asbestos, Fire and Building inspections, reporting and training services for Property Owners and Managers, as well as Real Estate Agents.

By doing all the required services and investing in systems and our people, we can confidently give cost-saving guarantees where you will save money.

Contact us at QBM today to find out more!