What is an admin and a sinking fund in a body corporate? These Q&As are about transferring money between the admin and sinking fund and also which account pays for what.
Table of Contents:
- QUESTION: Can money in the cash account be used to pay for a shortfall in the Administration Funds?
- QUESTION: When preparing our budget, should we reasonably expect the Body Corporate Manager to take into account the sinking fund forecast?
- QUESTION: Our building insurance is due soon. We intend to pay the insurance premium from the sinking fund and then recover this money from the administration fund over the year as lot owners pay their fees. Is this allowed?
- ARTICLE: What’s in your sinking fund forecast?
- QUESTION: What is the reason for not having separate accounts for an admin and a sinking fund in a body corporate? And why are body corporates prohibited from transferring money from one fund to the other?
- QUESTION: When raising additional funds for remedial works, is the amount divided equally or by lot entitlement?
- QUESTION: Our body corporate manager has paid an admin cost out of our sinking fund. What is the best course of action, as requests to the Body Corporate manager appear to be ignored?
- QUESTION: Administrative fund expenses have wrongfully been paid out of a sinking fund. The committee/body corporate manager refuses to correct this error. To fix the error, funds would need to be transferred from the sinking fund to the administrative fund. Would this be in contravention of the Standard Module Regulation?
- QUESTION: For our Insurance Valuation, the Body Corporate Manager advises that the cost should be debited to the Admin Fund rather than the Sinking Fund. What is your opinion on which strata account we should debit?
- QUESTION: We are installing solar panels. Does the expenditure for this come from the sinking fund or a special fund set up to collect and pay for this one off expense?
- QUESTION: We do not have enough in our sinking fund to carry out much needed painting. Can I demand the building be painted, stating it must be done otherwise we are in breach of the legislation?
- QUESTION: Can the sinking fund be placed into a term deposit without our permission?
- QUESTION: Is $57,000 a good amount to have in a sinking fund for 6 units including 2 ground floor units with courtyards in Brisbane?
- QUESTION: Our body corporate had a sinking fund forecast done in 2017. According to that, we should have just under $900k in that fund at present. We currently have about half of that. What is the best course of action here? Should a new forecast be done?
- QUESTION: If contingencies are not allowed to be included in the sinking fund forecast, how do we budget for unforeseen expenses during the year?
- QUESTION: What changes can the committee make to budgeting for the 10 year forecast?
- QUESTION: Does the Legislation require the Sinking Fund Forecast to be approved by the owners at a General Meeting?
- 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.
- 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.
- 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?
Question: Can money in the cash account be used to pay for a shortfall in the Administration Funds?
A Sinking Fund Term Deposit on being transferred to the Villas Cash account to pay for Pool refurbishment will have some cash remaining from the Term Deposit.
Can this money be used to pay for a shortfall in the Administration Funds which will not be able to pay the necessary accounts ( e.g. Insurance, Caretakers Fees, General Managers fees, normal electricity etc.) until after the A.G.M which is in June and levies have been approved until July Quarter 2020.
Answer: What you are suggesting is possible provided there is money available in the current account to pay the admin bills.
The funds released from your term deposit will be paid into the general account for your scheme and expenditure from both the admin and sinking funds is drawn from this. So, from a practical perspective, what you are suggesting is possible provided there is money available in the current account to pay the admin bills.
From an accounting perspective, one fund can’t lend to another. If the admin account doesn’t have sufficient funds to cover expenses it will go into deficit and this amount will need to be repaid at a future date. The sinking fund will continue to show the full amount ascribed to this account even if the actual cash available at the bank is below this amount.
This post appears in Strata News #494.
Question: When preparing our budget, should we reasonably expect the Body Corporate Manager to take into account the sinking fund forecast?
The Body Corporate had a Sinking Fund Forecast prepared. This included an estimate of painting all units in the scheme. This was an expensive task and was predicted to occur a number of years down the track.
The agreement with the Body Corporate Manager includes the following:
“….. Prepare for the purposes of discussion and approval by the committee a draft budget each financial year.”
Is it reasonable for the Body Corporate to expect that the Manager would include provision for the expenditure in the Sinking Fund Forecast to be considered when the Budget is prepared?
How could a Committee be seen to be acting reasonably if no provision was made for expenditure in the Sinking Fund Forecast?
Answer: It is reasonable to expect that the budget takes into account the sinking fund forecast. However, there is no specific obligation to do so.
To specifically answer the question – yes, it is reasonable to expect that the budget takes into account the sinking fund forecast. However, there is no specific obligation to do so.
The body corporate’s obligations are to approve a sinking fund budget which allows for a reasonable capital amount for anticipated sinking fund expenditure. This does not mean that there is an obligation to have a sinking fund forecast carried out by a qualified expert or to even specifically approve a sinking fund forecast.
In Los Monteros  QBCCMCmr 420 the adjudicator relevantly provided:
“The budgets for the next financial year can be based on actual expenditure for the last financial year, with any necessary adjustments. It is not necessary to engage a professional quantity surveyor to prepare a sinking fund forecast, however, some attempt must be made to reasonably estimate anticipated expenditure of a capital nature over a ten year period.”
Ultimately, the body corporate manager would prepare a draft budget as part of their engaged duties to the body corporate, the committee can then amend that budget and then it is up to owners to approve the budget. There is no requirement for any of those steps to be tied to the forecast, although in most circumstances that would be sensible.
The forecast will not always be accurate, and there may be a reason for the budget to divert from the same figures in the forecast. The only way the approved budget could be challenged is if an owner can demonstrate it is not a reasonable amount being raised for the anticipated expenditure required.
This post appears in the July 2021 edition of The QLD Strata Magazine.
Question: Our building insurance is due soon. We intend to pay the insurance premium from the sinking fund and then recover this money from the administration fund over the year as lot owners pay their fees. Is this allowed?
We are a new body corporate in QLD. We had our first AGM in February this year & there are 10 lots in the CTS. My enquiries relate to body corporate fees. Firstly, our building insurance is due soon and we intend to pay the insurance premium from the sinking fund and then recover this money from the administration fund over the year as lot owners pay their fees. Is this allowed to occur or does the insurance premium get paid from the administration fund? If there are insufficient funds to pay it, is a special levy/ contribution raised to pay it?
Secondly, lot owners want a CCTV system installed but there has been no budget set aside for this. Is this allowed to be paid for from the sinking fund or is a special levy/contribution to be raised to fund it?
Answer: Budgeting and finance can be particularly hard for new schemes as they typically start with zero in the bank.
Budgeting and finance can be particularly hard for new schemes as they typically start with zero in the bank.
Insurance should be paid for from the admin fund and ideally your first budget should have allowed for this. This might have included the possibility of raising higher levies on an initial basis to ensure sufficient funds for the insurance would be available at the time it was due. If the total of the budget was sufficient for the year it may also have been possible to change the way the levy was split so that the quarterly contributions were unequal with more money paid upfront in the first one or two quarters to allow for the insurance to be paid.
Still, it’s easy to say this after the fact. In practice it seems you may have sufficient funds across the year but some cash flow problems throughout it at times of large expenditure. This isn’t an uncommon problem. For an item like insurance it may be possible to spread the costs out with monthly instalment payments or to lower the total cost by taking out a six month policy – this would save you from having to make a large lump sum payment in one go.
Otherwise, many plans would still pay the insurance from the admin fund with the effect that this fund would go into deficit. The difference would effectively be ‘borrowed’ from the sinking fund (most of the time the money all comes from one account) and as levies are paid over the year the ‘borrowed’ amount is repaid. It’s not great practice to go into deficit but if it helps get you through a cash-flow issue over the short term it’s a practical solution, provided the money is paid back of course.
One alternative to this may be to have a special levy to increase the liquidity of the scheme. Lots of new plans struggle because they want to set up the building but lack the funds to do it. Special levies are rarely welcome but as a starter for the property getting owners to inject some funds can help ease this type of situation.
This post appears in Strata News #487.
What’s in your sinking fund forecast
As documents go, sinking fund forecasts aren’t that too hard to read, but they are packed full of information about the running of a body corporate scheme that’s easy to overlook.
A typical sinking fund forecast starts with some general information about the purpose of the report and the nature of the building, including its age, the number of lots and the unit entitlements. There will also be a line item showing the balance of the fund at the time the report was written, and this figure, combined with the condition of your building, will strongly influence the recommendations that follow.
The meat of the forecast comes in the recommended contributions over a 15-year period. Depending on the company you have used to provide your report, the terminology and presentation of this information will vary, but typically you will see a table or some tables that detail proposed annual contributions and spending while setting out the anticipated position of the plan at the end of each period. They may look something like the table below, although this is a condensed version for ease of use.
What information does the Sinking Fund Forecast contain?
Let’s unpack some of that information contained within the Sinking Fund Forecast:
Year/Financial Year to
‘Financial Year To’ is the year of the sinking fund forecast from the date of creation, while the financial year is the financial year of the plan in which the expected contribution should be made.
‘Contribution’: tells you how much you should budget for as a sinking fund contribution in that financial year. In the example shown in the above table, the anticipation is that in the financial year to 31/01/2022, the scheme should budget $6543.60. Typically, this is the number that a body corporate manager will list when providing you with a budget proposal for your site as they rely on the forecast for budgeting purposes.
Contribution per Lot Entitlement
‘Contribution per lot entitlement’: tells you how much each unit entitlement will pay as a part of the recommended contribution. It can be a difficult one for people to interpret as owners don’t always think about their unit in terms of entitlements. If you are discussing the sinking fund forecast, it may be beneficial to multiply this figure out so that an actual dollar figure of contribution per lot per annum can be seen. It’s much easier for someone to understand that they need to contribute $960 per annum to the sinking fund than it is for them to know they will pay $7.92 per lot entitlement per annum.
‘Anticipated Expenses’: These are expenses expected from the sinking fund on a year to year basis. Later in the document, these will be detailed with a breakdown of all expenses. It’s worth noting that while the recommended contributions are usually kept fairly steady with small increases over time to help owners with financial planning, the anticipated expenses can fluctuate significantly on a year to year basis. This reflects the fact that while there may be some quiet years when owners make minimal investments in a scheme, these are likely to be followed by years when a major project is undertaken.
Many people tend to think of the sinking fund as just being for savings, but it is really a guide for spending and the savings are raised to facilitate that.
‘Balance’: this is the anticipated balance at the end of the financial year. Figures include additional anticipated income from interest via term deposits.
That’s the headline information but the remainder of the document contains some key small print in the anticipated expense and exclusions that can be easy to overlook.
The anticipated expenditures section usually sets out in detailed tables a multitude of standard maintenance items, how much they might cost to repair and when the repair might be anticipated. An individual line item may look something like this:
Here, the reports anticipate an expenditure of $1947.00 on downpipe repairs in 2025 and a further $4332.00 in 2028.
How much faith should you place in the Sinking Fund Forecast?
The obvious question is how much faith should you place in these projections? Well, no one has a crystal ball so the figures aren’t an absolute directive.
If your gutters are in good working order in 2027 when the report is predicting repairs are required, there’s no need to take any action. Equally, the gutters may have had problems earlier than average, and you might have had to pay for them in 2024. Most sinking fund forecasts have some contingency budgeting to allow for this unforeseen expenditure, but otherwise, they will consider the balance of probabilities in their projections and owners will have to be practical in their interpretations of how to undertake expenditure.
This allows some scope for owners to defer payments and works which is why many schemes don’t follow the sinking fund forecasts, but over the long run costs like this often balance themselves out. The gutters may not need work in 2027 but perhaps the intercom system breaks down that same year a couple of years before it should. Schemes that follow the contributions schedule tend to have the capacity to ride these situations out. Those that don’t can find the problems quickly mounting up.
So, What’s NOT Included in the Sinking Fund Forecast?
Just as important as what is included in the report is what is not. Along with checking the expected costs, you need to review the exclusions as there can be some large cost items that aren’t considered.
Safety items aren’t in there. Nor, usually, is fire maintenance or expenses for lifts. Items that are usually
covered in the admin budget, such as maintaining the gardens or air conditioners, are not part of the report. Upgrades, as opposed to maintenance, also aren’t there, so if you want to substantially improve your pool, additional funding may have to be sought. Forewarned is forearmed so even if your scheme followed a forecast to the letter you could still reasonably expect further costs over time.
This post appears in Strata News #471.
Question: What is the reason for not having separate accounts for an admin and a sinking fund in a body corporate? And why are body corporates prohibited from transferring money from one fund to the other?
For accounting purposes body corporates have two accounts – an admin fund and a sinking fund. In practice most body corporate work with one current account from which money from either fund is drawn. This can create confusion over how much money schemes really have allocated to either fund and how much money they really have to use on an immediate basis.
What is the reason for not having separate accounts for an admin and a sinking fund in a body corporate? And why are body corporates prohibited from transferring money from one fund to the other? I can understand that this may not be good practice but ultimately it is the owners money.
Answer: It is important that bodies corporate are unable to transfer money between funds as the money has been raised for a particular purpose.
The body corporate is required to keep various financial statements and proper accounting records which confirm the amounts allocated to each fund – so there is no need for multiple accounts.
It is important that bodies corporate are unable to transfer money between funds as the money has been raised for a particular purpose. For example, if money was transferred from the sinking fund to the admin fund for an administrative expense, all that would do is create a future issue when the money originally earmarked to be used from the sinking fund becomes due.
It is correct to say that this is owners’ money – but more importantly owners have already decided in advance as to how to apply those funds when the levies and budgets were set at general meeting. Transferring funds would contradict that earlier decision.
This post appears in Strata News #482.
Question: When raising additional funds for remedial works, is the amount divided equally or by lot entitlement?
Our body corporate is authorising remedial works and maintenance such as roof repairs, painting of the whole building etc. Additional funds are required for the work as there are not enough funds in the sinking fund.
Is the amount divided equally between the number of units OR should the amount be divided by the size of the units [1 bedroom and 2 bedrooms etc]? I only have a 1 bedroom unit and the other units are 2 and 3 bedrooms.
Answer: The expenditure should be divided on the basis of unit entitlement as recorded on the CMS.
The expenditure should be divided on the basis of unit entitlement as recorded on the CMS. This is automatically the case if funds are being used from the admin or sinking fund. If funds are being raised via a special levy the motion to approve this should state that the levy is being raised using unit entitlements. If a different method is being applied there may be a reasonable reason for this, but you would expect this to be clearly outlined in the motion and explanatory notes and may require the consent of all owners to be approved.
This post appears in Strata News #481.
Question: Our body corporate manager has paid an admin cost out of our sinking fund. What is the best course of action, as requests to the Body Corporate manager appear to be ignored?
Our body corporate manager has paid an admin cost out of our sinking fund and this has not been rectified. We are only a smaller entity of 37 Lots. Most expenses are for gardening.
This amount paid in error was not budgeted for in last year’s figures so upsets both admin and sinking fund budgets. It amounts to one third of our costs.
What is the best course of action, as requests to the Body Corporate manager appear to be ignored.
Answer: A motion should be prepared at general meeting to correct the funding issues. This should extend to replenishing the sinking fund for the expended funds through future levies.
A motion should be prepared at general meeting to correct the funding issues. This should extend to replenishing the sinking fund for the expended funds through future levies. Ideally, the committee would arrange for the motion but an owner also has the ability to prepare the motion and submit it at the next general meeting.
This post appears in Strata News #461.
Question: Administrative fund expenses have wrongfully been paid out of a sinking fund. The committee/body corporate manager refuses to correct this error. To fix the error, funds would need to be transferred from the sinking fund to the administrative fund. Would this be in contravention of the Standard Module Regulation?
Answer: It wouldn’t amount to transferring amounts between funds but that does not mean there is no remedy available.
It wouldn’t amount to transferring amounts between funds but that does not mean there is no remedy available. It would contravene a separate part of the legislation, being section 148 of the Body Corporate and Community Management (Standard Module) Regulation 2008 (Qld) (Standard Module).
Assuming the expense was one that ought to have properly been paid out of the administrative fund I presume that was because it was not previously budgeted for.
In such a circumstance, the body corporate should be asked to consider a motion:
- raising a special levy for any unbudgeted expense – pursuant to section 141(2) of the Standard Module; and
- reauthorising the expense from the administrative fund with an adjustment made to replenish the sinking fund. This is a better outcome than simply trying to invalidate the resolution for the expense as third parties may have already been paid or the works may be required in any event.
Depending on when the AGM next is, it might be easiest for the motions to be considered at that time to avoid the costs of an EGM.
This post appears in the November 2020 edition of The QLD Strata Magazine.
Question: For our Insurance Valuation, the Body Corporate Manager advises that the cost should be debited to the Admin Fund rather than the Sinking Fund. What is your opinion on which strata account we should debit?
Our Committee obtains a fresh Insurance Valuation about every 2 or 3 years eg the most recent one was done in Feb 2019, and the previous one in March 2016. There is no suggestion of obtaining one every year.
The Body Corporate Manager advises that the cost should be debited to the Administrative Fund rather than the Sinking Fund. What is your opinion on which strata account we should debit?
Answer: The sinking fund can only be used for spending of a capital or non-recurrent nature.
Todd Garsden: The sinking fund can only be used for spending of a capital or non-recurrent nature.
The insurance valuation would not fall into that category so must be spent from the administrative fund.
Kaylene Arkcoll: I agree with Todd Garsdens’ advice that the expense should be paid for from the administrative fund rather than the sinking fund.
I think there is a very persuasive section of the legislation which hasn’t been mentioned in the published discussion (see the comment section below).
The section of the legislation which requires the body corporate to obtain a full replacement valuation every 5 years also says how the owners are to pay for that valuation. (This is section 181 in the BCCMA (Standard Module) Regulation.)
- The owner of each lot included in the community titles scheme is liable to pay a contribution levied by the body corporate for the cost of the valuation of the building or buildings that is proportionate to the amount of the premium for reinstatement insurance for the building or buildings for which the owner is liable under this part.
- The contribution that the owner of a lot is liable for may be recovered by the body corporate as part of the owner’s annual contribution to the administrative fund.
The body corporate cannot transfer funds between the Administrative and Sinking Fund accounts. So for the body corporate’s accounts to balance, the insurance valuation must be paid for from the Administrative Fund.
The wording of section 181(4) is identical to the wording of section 182(3), which controls the payment of the building insurance premium from the administrative fund.
The more interesting point is that section 181(3) requires the cost of the valuation to be shared in the same proportions as the cost of the insurance premium.
Section 182 requires the cost of the building insurance premium to be paid by the lot owners:
- based on the interest entitlement schedule of lot entitlements, if the lot was created using a building format plan, or
- based on the proportionate cost of reinstating the lot, if the lot was created using a standard format plan.
The relevant point is that regardless of which of these apply, the cost of the replacement insurance valuation cannot be included as a standard line item in the administrative budget, as these costs are shared using the contribution entitlement schedule. Instead, like the insurance premium contribution, it must be calculated separately.
This post appears in Strata News #250.
Question: We are installing solar panels. Does the expenditure for this come from the sinking fund or a special fund set up to collect and pay for this one off expense?
I’m the chairperson of our body corporate committee. We have 10 units, two levels, and a common roof space.
We have been looking into solar panels and strata, and the decision to have solar panels added to our complex as part of the body corporate power requirements and usage.
Is this a capital expense or improvement for the complex? Also, can the expenditure for this install come from the sinking fund, admin fund or a special fund set up to collect and pay for this one off expense?
We seem to be of divided opinion, especially regarding which account to debit. Can you shed some clarity on this, please?
Answer: The spending can come from the sinking fund but if it hasn’t been budgeted for previously a special levy would need to be raised.
The installation of a new solar panel set up would be both an improvement and spending of a capital nature. The spending can come from the sinking fund but if it hasn’t been budgeted for previously (which it sounds like is the case) a special levy would need to be raised to replace the funds originally allocated to other spending. There is no ability to set up a special fund other than the administrative or sinking fund.
This post appears in Strata News #187.
Question: We do not have enough in our sinking fund to carry out much needed painting. Can I demand the building be painted, stating it must be done otherwise we are in breach of the legislation?
We pay low levies which have not increased since I’ve been an owner. The sinking fund balance is low. When I purchased 5 years ago the building needed painting. This has never occurred.
Painting has been discussed again but the lot owners all say we cannot afford the expense. Can I demand the building be painted, stating it must be done otherwise we are in breach of the legislation? I’m worried the building will suffer structural damage if the painting is not done.
Answer: The ‘sinking fund forecast’ would or should have indicated when repainting was due.
William Marquand, Tower Body Corporate:
If the property needed repainting when you bought it 5 years ago, enquiries should have revealed whether there would be sufficient funds in the ‘sinking fund’, and the ‘sinking fund forecast’ would or should have indicated when repainting was due.
To take this matter further, you may need to seek independent legal advice – which we can’t provide in this forum.
Chris Irons, Hynes Legal:
So it sounds like what you’re saying is that the motion to approve levies for repainting keeps getting defeated. Assuming that’s right then yes, you can challenge that outcome through the Commissioner’s Office. You’d need to demonstrate why the decision to decline is unreasonable. Do you have, for example, a report that shows that the painting is necessary?
One thing you can do before you take that step is to communicate with other owners to say that you intend doing this. That might motivate them to think differently on levies in future. If the next general meeting is yet to take place and the repainting issue is again on the agenda, you can also do some lobbying before the meeting to impress upon everyone why it should pass.
I find that the hip pocket approach generally works well. Impressing upon the other owners that their property values will suffer without repainting (assuming that’s the case) might be a good thing for you to communicate also.
This post appears in Strata News #431.
Question: Can the sinking fund be placed into a term deposit without our permission?
Could our sinking fund have been placed into a term deposit to get interest without our permission?
Previously we’ve been charged $220 in bank fees for an amount of $2000 in our sinking fund. The only explanation from the body corporate manager was that the amount was for bank fees but we think it may have been a fee to cancel a term deposit and withdraw funds out early.
We thought the sinking fund was for the repair and maintenance of the building. How can we find out what has occurred?
Answer: It is usual practice to put the sinking fund monies into an interest bearing account if not needed immediately.
The sinking fund typically includes:
- owners’ contributions to the sinking fund
- interest received from the fund’s investments
It is usual practice to put the sinking fund monies into an interest bearing account if not needed immediately – otherwise, it’s ‘dead money’.
There is probably a small fee involved in moving money into or out of an investment account, but your first question should probably be whether your committee (assuming there is one) authorised such an investment and if not, whether your body corporate manager has maintained a proper record of the fees reasonably incurred on behalf of the body corporate.
This post appears in Strata News #403.
Question: Is $57,000 a good amount to have in a sinking fund for 6 units including 2 ground floor units with courtyards in Brisbane?
Answer: If there is no sinking fund forecast, a good starting point would be to obtain one in order to both determine whether there are sufficient savings
There is not really enough information on which to base an answer.
For example, what is the age and condition of the complex and has a sinking fund forecast been prepared? If the savings are in keeping with a sinking fund forecast, then the amount is probably ok. If there is no sinking fund forecast, a good starting point would be to obtain one in order to both determine whether there are sufficient savings and most importantly, to plan for the future maintenance needs of the complex and owner levies.
This post appears in Strata News #395
Question: Our body corporate had a sinking fund forecast done in 2017. According to that, we should have just under $900k in that fund at present. We currently have about half of that. What is the best course of action here? Should a new forecast be done?
Answer: If there is a definite shortfall, then something does not add up – maths doesn’t lie!
If the sinking fund balance does not match the sinking fund forecast projection:
- Check that the projection date is correct – the ‘year end’ can sometimes be confusing.
- Check that the budgets match the projected yearly amounts to be raised – otherwise you will fall short.
- Check that the contributions being raised, match what the budget requires – if they don’t you will fall short.
- Check if there are outstanding sinking fund contributions – do they account for the shortfall?
If not, see if significant expenditure has been brought forward, or is for work not in the sinking fund forecast – sometimes work has to be done more quickly than expected, or was not originally accounted for.
After the above, if there is still a shortfall, then something does not add up – maths doesn’t lie!
Once you have the cause/s pinned down, you can then take appropriate remedial action. That may include:
For budgeting mistakes – increase the amount of the contributions (perhaps over time) to make up the shortfall.
For outstanding contributions – take action to recover them, use the discounting and penalty (interest) provisions in the next budget and tweak the contributions upwards.
For work not in the sinking fund forecast – if the work was not in the forecast but it was in the budget, then increase the contributions to cover the shortfall (again consider doing this over time). If the work was not in the budget then there should have been a special contribution (special levy); so there should be no shortfall!
For work brought forward – consider getting an updated sinking fund forecast. Why? Because the forecast takes into account interest earned on the corpus of the fund, to ensure that there is enough money in the fund when it is scheduled to be spent. If you undertake major spending early, then the interest income might not help you meet the next major expenditure.
This post appears in Strata News #475.
Question: If contingencies are not allowed to be included in the sinking fund forecast, how do we budget for unforeseen expenses during the year?
An article about whether you can have contingencies in a body corporate budget, written by Hynes Legal, states:
If you think it may cost $100,000 for the lifts to be replaced, make the anticipated expenditure (and corresponding sinking fund levies to be raised) $110,000
The dilemma with this is that more often than not the sinking fund budget for a particular year bears no resemblance to the levies to be raised for that year because of the need for levies to take into account future major expenditure, such as the replacement of lifts and building painting that may take place say every ten years.
Our sinking fund forecast for our building (and presumably others) contains a 15% contingency however the contingency is calculated on 15% of the aggregated expenditure for the period of the forecast and divided evenly over that period (increased by an inflation component).
In other words, the contingency in both the annual budgets and the levies raised for each year bears no resemblance to the expected expenditure for that year.
Allocating the contingency to the items already in the budget as helpfully suggested in the article doesn’t get over the problem of the prudent need to allow for expenditure items that aren’t foreseen (a key reason for a budgeted contingency given that known expenditure items can be reasonably estimated when preparing the budget which is often 2-3 months into the financial year) because it isn’t permitted to spend monies for items not in a particular year’s budget.
Based on the above, is it unlawful for contributions to be raised in accordance with the way our forecast is structured?
Is it permissible to use sinking fund monies for capital expenditure included in an annual budget that hasn’t been included in the 10+ year forecast from monies then surplus to requirements because of the over raising of levies arising from the contingency and underspending of forecasted expenditure?
Answer: What the legislation requires and what common sense might dictate should be practice are (unfortunately) not the same thing.
What the legislation requires and what common sense might dictate should be practice are (unfortunately) not the same thing.
We know from adjudications that you cannot include a contingency as a line item in a budget.
If you cannot foresee an expense, then it gets left out of the budget, and a special levy raised as needed – remembering that including an item in a budget itself does not mean that there is the approval to spend that. You still need to go and address any spending limit / quoting issues regardless.
Having said all that, I know lots of bodies corporate include contingencies and then do shuffle around allocations inside budgets when unforeseen issues arise. That is just not in accordance with the legislation and you run the risk of some disaffected (or point-scoring) owner challenging the process.
Regarding your final question: Allocating the contingency to the items already in the budget as helpfully suggested in the article doesn’t get over the problem of the prudent need to allow for expenditure items that aren’t foreseen (a key reason for a budgeted contingency given that known expenditure items can be reasonably estimated when preparing the budget which is often 2-3 months into the financial year) because it isn’t permitted to spend monies for items not in a particular year’s budget.
Yes, provided you comply with the statutory spending limit requirements.
This post appears in Strata News #283.
Question: What changes can the committee make to budgeting for the 10 year forecast?
Is it permissible for a Committee to do either or both of the following without seeking approval at a general meeting? Expend, albeit within its spending limit, some 3 to 4 times on a sinking fund budget line item. Bring forward expenditure, albeit within its spending limit, budgeted for the following year in the 10 year forecast, but not allowed for in the current year’s budget.
Answer: These are budgets – they are never going to be perfectly precise.
The important issue to remember is that these are budgets – they are never going to be perfectly precise. Some years budgets will be under, and in other years, they will be over.
The legislation relevantly provides that:
“If a liability arises for which no, or inadequate provision, is made in the budget, a special contribution must be raised.”
A special contribution can only be raised by an ordinary resolution at general meeting. Accordingly, taking a strict interpretation, a general meeting would be required to authorise the additional funding for the unbudgeted expenditure.
However, adjudicators take a more flexible approach as to when this general meeting needs to be held. In Valley Terraces Echohamlets  QBCCMCmr 314 the adjudicator relevantly provided:
“Spending amounts above what has been budgeted might be poor practice. However, it is not specifically prohibited. If spending below the committee limit is validly authorised then there seems to be nothing wrong with the committee subsequently calling a general meeting at which amended budgets can be adopted, based either on the body corporate power to change its decisions or ratify irregular decisions. If owners do not agree to adopt an amended budget so the spending is within the new budget then owners will have no choice but to levy a special contribution to meet this unbudgeted expenditure (Standard Module, 141(2)). However, the legislation does not require the special levy to be adopted before the spending occurs.”
Accordingly, yes – the additional spending in excess of the budget does need to be authorised at general meeting.
However, that further authorisation does not need to take place before or immediately after the spending takes place. Unless it is going to substantially impact on the body corporate’s cash flow, the authorisation can probably wait to be readjusted at the next annual general meeting. That would also save for the costs of an EGM (which also would probably not have been budgeted for).
This post appears in the March 2021 edition of The QLD Strata Magazine.
Question: Does the Legislation require the Sinking Fund Forecast to be approved by the owners at a General Meeting?
I understand that both the Admin and Sinking Fund budgets must be approved each year by the body corporate at a General Meeting. I also understand that a Sinking Fund Forecast must be prepared which provides a guide to anticipated spending requirements for a specific time into the future.
Does the Legislation require the Sinking Fund Forecast to be approved by the owners at a General Meeting?
Answer: The legislation requires the budget to be put to owners at a general meeting.
The legislation requires the budget to be put to owners at a general meeting. Section 139 of the Standard Module provides for the budget and in particular, the sinking fund budget which is where the forecast is contained.
There isn’t any explicit provision for the forecast to be put to a vote, but think of it this way: if owners are being asked to approve the budget and that budget is based on a completed forecast, then they’re effectively approving the forecast by that method anyway.
Also, that forecast would be a body corporate record and available to owners and others to access, even if it didn’t go to a vote at a general meeting.
This post appears in Strata News #350.
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:-
- 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;
- fixing the amount to be raised by way of contribution to cover the capital amount required; and
- 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 seem 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.
Have a question about transferring money between the admin and sinking fund or something to add to the article? Leave a comment below.
- QLD: Q&A Implementing the 10 year sinking fund forecast
- QLD: Q&A Levy Increases – As Lot Owners, Can We Refuse?
- QLD: Q&A Requirements for Body Corporate Committee Members
- QLD: Q&A Insurance Valuation – which strata account do we debt?
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