A Guide to Sinking Funds

July 11th, 2017

Strata Data - Why Owners Should Always Attend Body Corporate Meetings (2)

Please note, the below article provides general rules that will vary from state to state.

Sinking funds and other levies are the primary means by which strata management funds the upkeep, improvement, and replacement of shared and common property across lots. These funds are contributed by lot owners towards the expenditures necessary for the communal space they’ve bought a portion of, and are both required under law, as well as stringently managed to prevent misuse.

Sinking vs. administration funds

There are two things people mean when they say ‘sinking fund’: often colloquially it will be used to refer to a sinking fund plan, and other times it will be used to refer to the distinction between day-to-day upkeep and future preventative upkeep.

Strictly speaking, a sinking plan, or a reserve fund, is an emergency pile of funds for untoward circumstances and future works or maintenance, whereas an administration fund is used to fund budgeted repairwork.

However, a sinking fund plan is a medium-to-long-term plan that outlines the breakdown of the sinking fund, and the maintenance assets for the strata.

How do sinking funds work?

In the basic strata scheme, where individuals or corporations purchase a lot portion of an area that includes common property, ownership of that common property is equally divided between the combined owners of the land.

This is in turn held in trust by the strata corporation, according to the SA s10 Strata Titles Act 1988. Due to this, it is directly the responsibility of the corporation to upkeep community land.

What defines common property?

Common property can sometimes be an ambiguous term, especially when it refers to situations where common sense doesn’t naturally apply to a piece of land that could be considered both under individual and group ownership. However, in general terms it refers to:

  • Exterior walls, fences, and gates
  • Any wiring or piping that is not for the use of an individual property, including those that feed into them
  • Any exterior space that isn’t the confines of an individual lot, or on the boundary
  • Any structure installed on common property by the strata corporation
  • In many cases, exterior trappings such as a roof or foundations are considered technically common property under an exterior wall.

In addition, specific structures may also act as an addendum to individual property, such as garages or gardens.

How are levies raised?

Levies and budgets are both decided upon during the body corporate Annual General Meeting (AGM), where an elected committee of lot holders take upon the duties of ascertaining the acquisition and breakdown of funds necessary to upkeep.

In most strata, the cost of each individual levy is collated, and the approximate worth of each levy as a proportion of the whole dictates the amount of upkeep necessary for that unit. In some other cases, this may instead be a flat fee for all constituents.

These are a compulsory contribution from lot owners, and is a part of the contract they opt in to through becoming part of a strata scheme. In fact, if they are not paid, they can be sued from the lot holder by the strata corporation as a failure to uphold that bargain. Overdue payments may also be held to a level of interest not exceeding 15% P.A.

How does this interact with individual unit upkeep?

Commonly, strata lot owners will have a requirement to upkeep their own individual lots, while the strata corporation tends to the communal areas. The corporation has certain rights to require repairs and maintenance upon individual properties (aka, they cannot fall into disrepair), but has no financial obligation towards them. If an owner has let a property fall into disrepair, the corporation can enforce repairs with the owner liable for payment at the completion.

Can I use this fund?

The requirements in order to actively use the money in a sinking fund vary state to state. In all cases, you must develop a formal motion to the manager of your strata that will be brought up at the next with AGM. In extreme cases, this may call for an Extraordinary General Meeting (EGM) to take place instead.

In Victoria, strata schemes must have a 10-year maintenance plan (updated annually), while in South Australia there is no long term obligation, but lots over 100 units or those that collect $200,000+ in levies annually must plan and raise their own funding.

Adding a resolution to the project that is ratified through a meeting will allow owners to use funds from the sinking fund for use specifically on communal ground projects.

What if the sinking fund isn’t enough?

In extremely rare cases where a sinking fund is found to be underprepared for an emergency cost, and the owners are prepared to do so, a special levy can be raised alongside the regular levy in order to acquire necessary funding. Due to the checks and balances within plans, this is a very rare situation, but may still crop up from time to time.