Sinking Funds & Sinking Fund Forecasts

Mike Mortlock

A sinking fund is set up by the owners corporation of a strata titled development, to cover the costs of future capital expenses, which include for example, painting the building, driveway refurbishment, replacement of common property items like carpets, roofing and guttering and lift overhauls.

What is a Strata Title?

Put simply, Strata Title is a system for  handling the legal ownership of a 'portion' of a building or structure. These 'portions' can be made up of many  different styles ranging from units, townhouses, villas, commercial offices,  factories, retail shops, etc.
Strata titles exisit in many different  types of developments, including;

  • residential
  • commercial
  • retail
  • mixed use - ie retail and/or commercial and/or  residential
  • serviced apartments
  • retirement villages
  • caravan parks
  • resorts

The owners corporation is responsible for protecting the development assets by ensuring all maintenance and repairs are  carried out when needed.
Ultimately, the responsibility of the Owners Corporation is to look after all aspects of the Common Property of the Strata Scheme.
This is something that must be determined from the beginning. The NSW Dept of Fair Trading states that the  owners corporation must repair common property whilst owners are responsible for any repairs within their unit or 'lot'.

What is usually considered Common Property?

As we all know, repairs and defects can develop at any time and, as a building ages, repairs will be needed. 
Careful planning is essential from  the beginning to ensure that appropriate allowances for replacement and repairs  have been accounted for.
Many Strata Schemes, for a variety of reasons, may find themselves in  the position where money is desperately needed to pay for essential repairs or  renovations but the bank account is 'empty'
An example of some of the common ‘common area’ items are:

  • roof replacement
  • concrete driveways and paths
  • guttering replacement
  • fire safety equipment
  • lift upgrades
  • balcony repairs
  • building facade repairs
  • cracking to walls and subsidence
  • pool facilities
  • carpet replacement
  • common property painting and maintenance
  • rendering the building's façade
  • foyer areas
  • landscaping (fencing, plants, etc)
  • balustrades

How to ensure that sufficient funds are retained?

In past years, it was very common for many owners corporations to avoid looking to the future or minimising  their sinking funds to the eventual detriment of all the owners in the scheme.
Therefore the outcome was that when the time would come when something  had to be either replaced or repaired, there were no funds in the sinking fund  to do the job.  The Owners Corporation therefore had no other option but  to raise a Levy asking for money  to fix whatever had to be fixed.
Now, when this situation occurs there are a couple of options open to  the Owners Corporation including:

  • Don't do anything and wait until repairs are  required and raise the funds via a ‘passing the hat around’ or applying for a Strata Finance loan or  raise a special levy. (not  recommended)
  • Implement a Sinking Fund Levy (Sinking Fund  Forecast) so the works can be completed when required. (recommended)

Types of Strata Levies

Strata Levies must be determined and  administered by the Owners Corporation with levy notices being issued on a  regular basis. 

Strata Schemes should impose a regular strata levy, recommended to be collected  quarterly, on all the lot owners.  
The money collected is deposited  into the strata scheme's trust account and is then used to fund the running and  maintaining of the strata scheme. 
There are three types of Strata Levies:

  • Administrative Fund Levies - to  cover the day-to-day running expenses.
  • Sinking Fund Levies - for long term repairs and  maintenance
  • Special Levies - for all those unexpected  expenses where no funds were allocated.

Sinking Fund Levies (Sinking  Fund Forecasts)
 The Sinking Fund, also under the control of the Owners Corporation, is  essentially a large capital expenditure fund that pays for both expected  (long term) and unexpected replacement, repairs and maintenance.  
We have have noted some of the usual items requiring replacement above.
Working out just how much to allocate towards these unexpected events is  not an easy task and this is where the help of some experienced and  knowledgable people is required to ensure the Sinking Fund does what it's  supposed to. It is recommended that Quantity Surveyors provide a detailed cost  account and lifecycle for the forecast replacement of the item.
By handling the sinking fund properly, the  owners of the scheme may never have to face the dreaded Special Levy, since sufficient funds should always be available.

It is NSW law to have a Sinking  Fund Forecast!
Thankfully, due to increasing pressure from a number of areas,  legislation was passed to 'phase in' mandatory 10-year sinking fund  plans beginning from July, 2006  for all NSW Strata Schemes.  Essentially all NSW Owners Corporations now  have to have 10-year sinking fund plans done for their Strata Schemes in an  effort to eliminate the problems of insufficient  funds for capital works.
 By now, every scheme in NSW should have done their 10-year plans with  many now having to revisit these (and amend them if required) as per the  legislation. You can read the details about this requirement in the NSW  Strata Schemes Management Act 1996: Schedule 75A - Owners Corporation to prepare 10-year sinking fund plans.

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