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New Regulation for Strata Scheme Sinking Funds by Paul Anderson | May 2006

The Strata Schemes Management Amendment (Sinking Funds) Regulation came into force on 1 May 2006 and requires most existing strata schemes in New South Wales to commence 10 year sinking fund planning. On 7 February 2005, a requirement to plan sinking funds was introduced for new strata schemes registered after that date. The new Regulation now extends that provision to include older strata schemes. Sinking funds are intended to provide sufficient reserves for the long term maintenance and repair of buildings as well as replacement of common property items, as distinct from regular expenses, e.g. insurance premiums, which are covered by administrative levies. Expenditure on planning and replacement of guttering, roofing and fencing are examples of the items that sinking funds should provide for. Other examples in larger blocks might include replacement of lifts, air conditioning plants or swimming pools. Not infrequently in the past when a need for significant capital expenditure has arisen, the sinking fund has been found to contain very little by way of reserves. The problem is then compounded if some of the unit owners, frequently elderly or pensioners, are genuinely not in a financial position to pay a significant, unexpected special levy. The aim of the new Regulation is to ensure that owners corporations better plan their finances to minimise the risk of having insufficient funds when, for instance, expensive building repairs need to be carried out.

Gradual Introduction Strata schemes will be brought within the planning obligations according to their respective plan numbers. By July 2009 all schemes will be covered (with the exeption of two lot strata schemes - these schemes are not required to establish a sinking fund). Strata schemes will be brought under the new requirement as follows: • • • •

Strata Plans no. 50,000 and over by 1 July 2006; Strata Plans no. 30,000-49,999 by 1 July 2007; Strata Plans no. 10,000-29,999 by 1 July 2008; and Strata Plans no. 1-9,999 by 1 July 2009.

Planning Each strata scheme is required to plan ahead for estimated sinking fund expenditure over the following 10 year period, i.e. expenditure on items of a capital nature. Levies will have to be set accordingly to meet the 10 year estimate.

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Timing The first 10 year sinking fund plan must be on the agenda of the first Annual General Meeting after the relevant date specified above, and completed by the following Annual General Meeting. The plan must be reviewed within 5 years of the first Annual General Meeting. However, there is flexibility for owners corporations to annually review its plans to facilitate a 10 year rolling plan. Owners corporations will be required to have 10 year sinking fund plans for the entire life of the scheme. Plans can be developed with independent expert assistance, but this is not compulsory.

Conclusion The introduction of long range planning requirements for all strata schemes can only be welcomed and has addressed a long neglected issue in the home unit industry. Without an adequate sinking fund, the maintenance of all home unit buildings was bound to decline as they age, not to mention the tension likely to develop between individual lot owners. Each owners corporation will need to be aware of its particular starting date for the new requirements. In the case of large blocks of units, consideration should be given to retaining expert assistance in preparing the 10 year sinking fund plan. Purchasers of lots in a strata scheme should also be aware that levies are likely to rise to finance the sinking fund. A prudent purchaser in the next few years should make enquiries to ascertain the amount in the sinking fund and whether it is likely to be adequate or if there is likely to be a need for special levies.

For more information please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 11 | 350 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099

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New Regulation for Strata Scheme Sinking Funds  

The Strata Schemes Management Amendment (Sinking Funds) Regulation came into force on 1 May 2006 and requires most existing strata schemes i...