Question: We are a four lot body corporate and some residents believe that a sinking fund is not mandatory. If sinking funds are not mandatory, why should we have one?
Answer: A sinking fund forecast is mandatory.
A sinking fund forecast is mandatory to the extent the legislation states the following;
A Sinking Fund budget must allow for raising a reasonable capital amount from contributions to provide for necessary and reasonable spending for the current financial year, and also to reserve an amount to meet likely spending for at least the next nine [9] years after the current financial year, having regard to:
- likely spending of a capital or non-recurrent nature.
- replacement of major capital items.
- other costs that should reasonably be met from capital.
The legislation does not specifically state who must compile this forecast/budget, however, Quantity Surveyors, as construction cost experts, are the most relied upon professionals in the market to assist with these lifecycle type budgeting estimates. Sinking fund forecasts, when compiled correctly, can help reduce the need for special levies regarding unplanned expenditure. They can also assist the committee when planning maintenance so that funds are available when the work is required. This also goes a long way to ensuring the enduring value of your property investment.
It is typical in the market to provide the body corporate with a 15 year forecast so that the body corporate gets a five year shelf life from the report, all whilst still complying with the legislation. However, the best managed sinking funds are updated annually to ensure levies are raised appropriately (neither too high nor too low) when considering the current financial position of the body corporate, recent works undertaken, upcoming works and current market fluctuations.
This post appears in the April 2023 edition of The QLD Strata Magazine.
Zac Gleeson
GQS
E: zac@gqs.com.au
P: 0419 755 896
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