Question: Can a body corporate use sinking fund money in the bank account to pay for unexpected and high admin fund expenses?
In preparation for my new role as treasurer on our committee for the next financial year, I am doing some research.
The webinar, ‘A deep dive into body corporate financials‘ was helpful and presented in an easy-to-understand way to construct and manage a budget.
Around the 29-minute mark, Will responded to a question about the effect of inflation on a budget. As part of his explanation, Will Marquand commented that if a budget blows out for some reason, a body corporate can access the cash in hand. I thought the money in the bank was restricted to use on sinking fund expenditure only, but Will’s comment suggests that money can be used for unexpected administration fund expenses.
Can sinking fund money in the bank account be used to pay for unexpected and high admin fund expenses?
Answer: The admin or sinking fund can have a negative balance, but for the scheme to be solvent, it still has cash in the bank to pay its bills.
For the most part, body corporate funds are kept in a single bank account, and the division between admin and sinking fund accounts is an accounting process rather than an actual divide of having the money in two separate accounts.
On your balance sheet, you should have a line item called something like ‘cash at bank’, and this is the amount of actual cash on hand your scheme has access to. If this number is low for the size of the scheme, near zero or is somehow negative, your scheme is probably in trouble. If it is positive and you can cover your ongoing expenses, the scheme may be comfortable – or at least manageable.
This cash at bank total is made up of monies allocated to both the admin and sinking funds. When the body corporate has an item of expenditure, it is allocated against one of those funds, and the accounts record the deduction from that fund. However, whichever fund you draw from, the cash at bank goes down by that amount. On this basis, it is possible for either the admin or sinking fund to have a negative balance and for the scheme to be solvent, as it still has cash in the bank to pay its bills.
For example, you might have an admin fund recording a deficit of $5000 and a sinking fund recording a surplus of $100,000. Cash at bank would be $95,000. Although it is not good to have a deficit in the admin fund, the scheme might not be that concerned in the short term because they could meet their ongoing expenses using the cash available. The admin fund might come back into surplus upon payment of levies, or an adjustment might have to be made to achieve this when creating a new budget. A situation where you might commonly see this would be after a scheme has paid its largest expense – the insurance premium. Because this tends to be a large payment all at once, not every scheme will have all the money available in their admin funds to cover the payment, but provided they have the cash at bank, it’s not a big problem. The payment can be made from the cash at bank, and if you have calculated the budget correctly, that money can be repaid as levies are paid over the next few months.
Of course, none of this is to say that it is advisable to run a deficit in either fund or that it should be normal or regular practice. Just that provided you have liquid funds available, it’s a manageable situation, and you have some time to resolve matters without having to call an immediate special levy to resolve the issue.
Running a deficit can hurt a scheme when you have to try to bring a fund back into a positive balance. If a fund has finished a year in deficit, the next budget needs to bring that fund back into a surplus. That requires higher levies or a special levy as you have to budget not only for forthcoming expenditures but also to make up for the deficit of the past. There tends to be quite a lot of unhappiness as a result.
Somewhat bizarrely, Queensland’s body corporate legislation doesn’t allow body corporates to budget for a contingency. This doesn’t make any sense to me, as having contingencies in budgets helps prevent deficits. Maybe someone out there can explain why this is considered a best-practice scenario. Still, I would rather have budgets that allow for some unknown expenditures and avoid deficits as far as possible.
This post appears in Strata News #656.
William Marquand
Tower Body Corporate
E: willmarquand@towerbodycorporate.com.au
P: 07 5609 4924
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