What is a sinking fund?

What is a Sinking Fund? By Zac Gleeson. Director GQS – Gleeson Quantity Surveyors

As per the Body Corporate and Community Management Act 1997 (The Act), a Sinking Fund is monies which are raised to allow for necessary and reasonable spending by the Body Corporate to maintain and replace capital items.

How are Sinking Fund monies raised? These monies are typically raised through Owner levy contributions (Sinking Fund levies), interest received from monies within the fund, interest received from the Fund’s investments (for example - term deposits) and monies received from insurance (for capital works required which are covered by insurance). When is a body corporate committee required to provide a budget or forecast for the Sinking Fund and who prepares the forecast? As per The Act, allowances must be made for the current financial year, and also to reserve an amount to meet likely spending for at least the next nine years into the future. This forecast can be prepared by an independent, professional Quantity Surveying firm (such as GQS) or by the Committee / Lot Owners themselves. Preparing a Sinking Fund Forecast requires extensive experience and knowledge in property and the costing of works required to property throughout its life cycle. Many capital replacements and repairs can be forecasted for with a high level of accuracy through knowing the average life span of particular items, knowing the average cost of these works now and being able to forecast for suspected cost movements during the budgeting period. Most independent reputable Quantity Surveying firms provide a 15 year forecast which is in excess of the regulations so that the body corporate can utilise the report for up to 5 years prior to updating the report. It is very important to keep clear records of works undertaken to the property in between the preparation of Sinking Fund Forecasts. If the end of year sinking fund balance is 10-20% out compared to the projected balance in your sinking fund forecast, you should get the schedule re-done. This will pick up any unexpected works which weren’t forecasted for or any works which were forecasted for which haven’t yet been completed. In this instance Lot Owners are either paying too much in Sinking Fund levies or too little. What costs are raised for and met by monies within the Sinking Fund? In accordance with The Act, Sinking Fund monies are used for: • Likely spending of a capital or non-recurrent nature; • Replacement of major capital items; and, • Other costs that should reasonably be met from capital. The largest typical expenses a Body Corporate’s Sinking Fund will be required to pay for is to re-paint the previously painted external surfaces and common area internal surfaces, as well as any major works required to passenger lifts. Painting and lifts are the two most common causes for the need to raise Special Sinking Fund Levies. What are Special Sinking Fund Levies? If it is deemed that there is not enough funds within the Sinking Fund to carry out necessary works, Lot Owners must agree to and raise what is called Special Sinking Fund Levies (or special contributions). Special Sinking Find Levies are raised in addition to regular Sinking Fund Levies so that adequate funds are available to carry out the required works. The requirement to raise Special Sinking Fund Levies typically only occurs when the Sinking Fund Forecast, or budget, has been underprepared or not prepared by a suitably qualified and experienced Quantity Surveying professional or monies out of the Sinking Fund have been previously used for improvements or unnecessary spending. Final Remarks The correct administration and planning of a Sinking Fund can make or break the financial viability of your investment in stratatitled property. It is important to consider the engagement of a suitably qualified and experienced Quantity Surveyor who can help you plan for upcoming major expenses, without the need for raising Special Sinking Fund Levies. At GQS in 2019 we consulted to 490 bodies corporate, from new developments to properties decades old, rely on our experience to ensure your Sinking Fund is ready for upcoming expenses.

Article supplied by Gleeson Quantity Surveyors Website gqs.com.au Phone 1300 290 235