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.
GET THE LATEST STRATA NEWS / ARTICLES DIRECT TO YOUR INBOX HERE
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.
Frank Higginson
Email Hynes Legal
Visit the Hynes Legal Website
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.
Paul Seymour
Seymour Consultants
T: 07 5573 4011
E: info@seymourconsultants.com.au
License numbers:
NSW – 15-101690-001
QLD – PMT2001482311
Read next:
Still after more about the sinking fund forecast or even more general articles about strata in Queensland? Visit our Your Strata Levies OR Strata Legislation Queensland
After a free PDF of this article? Log into your existing LookUpStrata Account to download the printable file. Not a member? Simple – join for free on our Registration page.
Have a question about your sinking fund forecast or something to add to the article? Leave a comment below.
My issue is the complete reverse, I am the current treasurer (for last 12 months) of a Small Scheme in Queensland and there is no 10 year sinking fund forecast. This has been the case since the initial Body Corporate Management was terminated by 4 of the 5 owners and nobody is listening to me. The scheme has been “self managed” for the last 8 years. The Secretary has refused to hold any committee meetings and has made it clear to anyone that will listen is that she has no interest in discussing anything with me. This committee, like all previous committees is dysfunctional and our current sinking fund (with no forecast) is totally underfunded and the property is deteriorating before my very eyes. Unfortunately I am only one voice of five, the other four unit owners refuse to pay more than what they currently do, both funds seriously underfunded. I have pushed for a Manager to mange the scheme, and that too has fallen on deaf ears. The other owners (including the secretary) do not appreciate that we have to comply with Legislation. Very frustrating as I see no end in sight as we can’t even sell the property.
We have received this comment in from Deborah Sullivan, QIA Group:
Whilst I am in a business that essentially sells these reports to strata title bodies corporate, depending upon the State and/or Territory of the particular scheme there are as everyone has agreed varying requirements.
Beer coaster budgets for some may work but on the whole, a report from a qualified and experienced QS would be the way to go.
Reports are also essentially guides (although NSW is tightening up on this) and if owners wish for the guide to be ‘more’ a few realisations may need to be made.
1. Reports ideally are based on all capital items and plant/equipment being properly maintained and unfortunately for the most part (and this is a general comment only and not made to anger or badger readers…) it isn’t.
2. Not all plant/equipment is accessible and can on occasion then be unknown – so not necessarily accounted for in a report. A cure for this is an asset register. This will create a full listing of all assets of capital nature along with their maintenance cycles, design standards etc. This will allow for key dates for maintenance of all now known assets therefore creating – along with a sinking fund forecast/capital works fund/maintenance fund – a complimentary process to ensure adequate saving to spending, expected lifespan of plant and equipment being met and more transparency as to the ins and outs for spending.
As a long-term prepare of sinking fund forecasts at Leary & Partners I think everyone commenting so far has made valid points.
Sinking fund forecasts should be prepared with experience, professional care to be as real world as possible. However, they are designed to cover expenses reasonably likely to occur over a 10-year time span, which means that inevitably they won’t be “completely accurate”.
The important thing to check before reducing levies or fund balances is the underlying reason for the underspend. If it is because allowances for work like pipe repairs in old buildings have not been required you can probably safely re-purpose those funds. If it is because items like painting have been deferred or major equipment has lasted longer than its anticipated life, it will be important that the funds are still there to be spent when the work is required.
We recommend that professionally prepared sinking fund forecasts be reviewed every 3 years. In NSW and Victoria the law requires a review at least every 5 years. That ensure allowances are kept current and over-acculated funds are automatically relocated to reduce future levies.
I agree sinking fund forecasts are nothing more than a professional projection of likely capital and maintenance costs for Common Property future liabilities. As stated above, the forecasts are only as good as the competence of the engineer or surveyor undertaking the forecast, It should also be noted that in some states, sinking fund forecasts are not required by the legislation, such as in the ACT. As Chairman of several strata committees in 3 states, my view is that a recurrent pattern of under-expenditure against the sinking fund forecast (and funds at bank) should lead to a Committee-directed reduction to sinking fund levies. In one BNE based strata, we have zeroed out the sinking fund levy contributions for the last 2 years to bring the sinking fund balance back into alignment with the forecast. Committees should also be aware that huge, unused sinking fund balances can also be a misappropriation risk for strata managers too tempted by the ‘opportunity’ funds, especially when sinking fund account statements are not routinely sighted by the Committee (which they rarely are). In another strata development in NSW, we generate income from an asset on the Common Lot which we use as the default sinking fund contribution and have not collected sinking fund levies for many years. In a further case in the ACT, where the common property is just a driveway and small garden area, I intend to propose the ceasing of all sinking fund contributions as there is no sinking fund forecast, minimal future exposure to capital maintenance costs and the existing sinking fund balance is in my view adequate to manage risk. Finally, I do not accept that lot owners should have any difficulty gaining full access to the sinking fund forecasts, the sinking fund expenditure and the sinking fund balance. All owners should be able to participate fully in the pre-AGM and AGM processes to assess year to date expenditures and contribute a view (and a vote) to the forward year sinking fund levy decision!
” I agree sinking fund forecasts are nothing more than a professional projection of likely capital and maintenance costs…”
If, as you so rightly say, they’re nothing more than a “professional projection”, and in many cases the use of the term “professional” is but ‘putative’, there’s no substantive reason as to why such projections can’t be made on the back of a beer coaster or suchlike at an AGM as is mentioned in the above fine article; and if done so in such manner at an AGM, it’d deftly provide each lot owner attending the AGM (with a notepad and pen) with all the information that they’d ever need about sinking fund forecasts etc….and more be$ide$.
When you say: “All owners should be able to participate fully in the pre-AGM and AGM processes etc…”, chance’d be a fine thing, because myriad owners are so apathetic nowadays about involving themselves in protecting their and other’s assets until the manures $hit$ the fan, and then, but only then, they’ll decide to worm themselves free from their wa$trel$’ woodwork with all matter of complaint. Bad ce$$ to ’em all I say!
Frank Higginson has provided the following response:
Phillip and Allan both raise very valid points.
If the sinking fund has been over-budgeted and there is no maintenance required then the only option is to reduce future levies.
We do have to appreciate the difficulty involved in a sinking fund forecast – it can’t be expected to be 100% of what the body corporate is going to spend in the next 10 years. That is just an impossible expectation. Bodies corporate need to be flexible enough to make sure any discrepancies are properly accounted for in the next 10 years of budgets.