These questions about the sinking fund forecast have been answered by Frank Higginson from Hynes Legal and Paul Seymour from Seymour Consultants.
Question: For the last two years the Body Corporate has significantly underspent against the current year expense forecast and then rolled the surplus into the next 10 year Sinking Fund forecast.
Our Body Corporate’s practice is to obtain an item by item 10 year Sinking Fund forecast from an external quantity surveyor each year and to use this forecast in framing the Sinking Fund levy for the following year.
The Sinking Fund forecast allows for an amount to be reserved for future years and an amount to cover current year item by item capital expenditure. This expense forecast is not routinely provided to owners. They must specifically ask for it. Most owners probably do not know it exists.
The problem is, for the last two years the Body Corporate has significantly underspent (approximately $70K each year) against the current year expense forecast and then rolled the surplus into the next 10 year Sinking Fund forecast. In addition, the item by item forecast has been ignored each year. Actual Sinking Fund expenditure by item bears no relationship to the itemised expense forecasts.
There is nothing in Committee meeting minutes to support these variations from the forecasts. The only way that I have found out is by digging into the detailed financials. I am concerned that either the 10 year Sinking Fund forecast has no clear rationale or the Body Corporate is neglecting to maintain the Scheme’s assets.
The problem has been brought to the Committee’s attention several times but they refuse to acknowledge it or to do anything about it. What recourse do owners have?
Answer: The Sinking Fund forecast isn’t always going to get it right – but it should be a guide and the actual spending should be based on the needs of the common property.
This is an interesting one.
We regularly get queries from clients about not having a sinking fund forecast or using a committee member to dodgy up one that suits the desires of the committee at the time. Other than the Act saying there is a need for a forecast, there are no requirements about the qualifications for the person who prepares one. A Quantity Surveyor is obviously best but in theory, they could be done on the back of a beer coaster if the committee were so inclined.
This issue really relates to the Module. The Modules require:-
(a) raising a sinking fund budget which raises a reasonable capital amount both to provide for necessary and reasonable spending from the sinking fund for the financial year and also to reserve an appropriate proportional share of amounts necessary to be accumulated to meet anticipated major expenditure over at least the next 9 years after the financial year;
(b) fixing the amount to be raised by way of contribution to cover the capital amount required; and
(c) maintaining common property and body corporate assets in good condition.
Sometimes the budget and the forecast do not match with the actual needs of the scheme. So one of the key things is whether the body corporate asset is in good condition. If it is, but there has been money put aside, then that extra money should offset the next budget forecast. If there is not enough money budgeted and extra spending is required then the body corporate needs a special levy in the meantime.
The Sinking Fund forecast isn’t always going to get it right – but it should be a guide and the actual spending should be based on the needs of the common property.
The owner needs to put their research to the committee and ask them to explain how the underspending is going to affect the building going forward, and also ask them to recast the forecast to take that into account.
When this reply was sent off to the lot owner, they got back to us with this further question:
The only other avenue that I can think of is challenging, via adjudication, the reasonableness of the Sinking Fund contribution budget. The argument is that it has been developed from an expenditure forecast that history has proven is highly inaccurate. I would be very interested to hear any thoughts on that approach.
To which Frank replied:
The very first thing is to try and self-resolve to understand the issue. You will need evidence of that before charging off to the BCCM.
If the response is not satisfactory, before making an application you would need to understand what it is you were seeking as an order. That would depend in a large part on what the response was.
This post appears in Strata News #141.
Question: Special levy funds were incorrectly paid into the administration account. The invoice was paid from our sinking fund resulting in a sinking fund in deficit.
Could you please advise on this situation: Five years ago we raised a special levy to cover a major repair.
Our strata managers placed the funds into our administration account. When the invoice was paid, the money was taken from our sinking fund resulting in a sinking fund in deficit. It has remained so ever since.
When we requested for the sinking fund to be reimbursed from the administration fund (the administration fund still holds the special levy monies), we were advised that funds cannot be transferred (QLD legislation) between funds.
Should this error have been corrected with a reverse journal entry or an end of accounting period adjustment? It appears we are now stuck with a sinking fund in deficit and an administration fund with all of our sinking fund monies in it. In our current budget, we have a Nil contribution to the administration fund. We are advised that the error can only be rectified in small amounts each year – so far 5 years and still our sinking fund is in deficit. What can we do?
Answer: The simple answer to the question is that the legislation does not cover what has occurred.
The simple answer to the question is that the legislation does not cover what has occurred.
Yes, section 146(7) of the Standard Module provides that Funds must not be transferred between the administrative fund and the sinking fund but that section is aimed at preventing bodies corporate from poor budgeting practices.
If the special levy was intended to be paid into the sinking fund (which it sounds like it was) then the mistake should have been reversed when it first happened. We do not think an adjudicator would have cited section 146(7) as a basis for preventing the correction. If the error can be corrected now, we do not see why that rectification should not occur.
This is not formal legal advice though!!! As always, there may be more to the story that we are not aware of….
This post appears in Strata News #166.
Question: What is the average price of a sinking fund forecast for a 26 lot complex in Queensland? Is it mandatory to have a sinking fund?
What is the average price of a sinking fund forecast for a complex in Queensland? Our strata has a combination of townhouses and units, with a total of 26 lots. We also have a pool.
How often should the sinking fund forecast be updated? Is it mandatory to have a sinking fund?
There seems to be discrepancies between the balances and I am concerned we are not collecting enough money to maintain the property. Our current sinking fund forecast is a 7-year maintenance plan which began in 2014.
Answer: Yes, having a Forecast is mandatory but following it to the exact forecasted amounts is not mandatory.
The Body Corporate and Community Management Act requires a Sinking Fund Forecast to be maintained and updated every 5 years. The cost for a Sinking Fund Forecast can range from approximately $300 – $10,000 depending on the size of the property. On average the approximate cost for a Sinking Fund Forecast for a 26 lot townhouse scheme combined with units would be between $600 and $800 as of August 2017. The forecast should be prepared by a registered Quantity Surveyor.
Yes, having a Sinking Fund Forecast is mandatory but following it to the exact forecasted amounts is not mandatory. If the opening balances are not consistent with that of the forecasted expenditure it may indicate that insufficient funds are being collected.
The purpose of Sinking Fund Forecasts is to cater for future capital works expenditure. If there are insufficient funds the committee may have to raise a special levy to pay for capital expenditures which will impact the owners.
Generally, Seymour Consultants will prepare a 15-year forecast and have it updated every 5 years. If the forecast in question was prepared in 2014, typically a review would take place in 2019, however, given the discrepancies it may be better to consider a review sooner.
This post appears in Strata News #159.
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