A sinking fund is an essential pool of money established by the owners’ corporations to cover the costs of future maintenance expenses of a strata building. In a strata building, such as a block of apartments, there are a range of expenses which include the repairs and renovations to common areas that need to be planned for. The costs of these works cannot be imposed on any one property owner alone.
What exactly is a sinking fund?
A sinking fund is designed to help owners’ corporations of strata buildings cover the cost of renovations or repairs to the building and its common areas. By regularly putting money into the sinking fund, there is an amount of money put aside for emergency and expensive costs for repairs or renovations. Depending on where you live in Australia, a sinking fund may also be referred to as a maintenance plan or capital works fund.
Where does the money in a sinking fund come from?
Property owners in a strata building will pay regular levies towards both the administration fund, which covers the cost of any insurances or contractors for maintenance tasks such as gardening, and the sinking fund which covers the costs of major and emergency repairs. Property owners pay a levy towards the sinking fund so that the owners’ corporation can maintain the building’s conditions and functions correctly, both of which are important for investors and property owners. By having all property owners contribute to the sinking fund equally, the financial burden is shared fairly among all owners.
What expenses does a sinking fund cover?
Much like a “rainy day fund,” a sinking fund is only used when there are major works or emergency repairs required to communal areas of the strata building. This may include painting the building, repairing the lifts, refurbishing the driveway, replacing the fencing, replacing the gutters, and repairing the swimming pool.
Are there any legal requirements around sinking funds?
All Australian strata schemes are required by law to have a ten-year sinking fund plan in place. The owners’ corporation must also demonstrate how the plan is going to cover the cost of repairing and maintaining common areas of the building. For example, if the owners’ corporation anticipates that it will need $100,000 in the sinking fund for the next ten years, it will need to levy $10,000 from the property owners every year. If there are 20 apartments in the building, each apartment owner will pay an annual levy of $500.
The owners’ corporation must budget for major works and essential repairs and maintenance to the building. To plan for this, the corporation must identify defects and potential future expenses within the building so they know how much money they will need in the fund to complete the works.
What should I know about sinking funds if I’m buying an apartment?
If you’re buying a property within a strata building, be sure to ask about the owners’ corporation’s long term sinking fund plan or any maintenance or repair work that is scheduled to take place. A well managed building will have a detailed and accurate sinking fund plan in place for a minimum ten year period. If your owners’ corporation doesn’t have a ten-year sinking fund plan, you can apply to the tribunal in your state or territory to dispute it. The corporation will then be instructed to meet its legal obligations.
As a general rule, older buildings require more repairs and maintenance so the sinking fund needs to be larger to cover the cost of the works. Modern buildings require less repairs and therefore, don’t need as much in their sinking fund making your levy much cheaper. If there is not enough money in the sinking fund when there is work carried out, you may also be charged a special levy or the annual levy you pay may be raised.
While a sinking fund means you have to pay an annual levy as a property owner, it does protect you from upfront expenses down the track. Remember to check with the strata owners’ corporation for their ten-year plan before purchasing a property so you know how much you can expect to spend on annual levies.