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2 Feb 26
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Check out our Complete Guide to Body Corporate Levies
The general goal of the sinking fund is to allow the body corporate to pay for all capital improvements and replacements as they become due, without the need for a loan or the issue of a special levy to owners.
To ascertain the funds needed, a sinking fund forecast is prepared – a detailed report of all elements of the building and common property requiring investment. This is usually renewed by a quantity surveyor every 5 years, but under some circumstances should be reviewed outside this cycle.
In this article, we cover the basics of a sinking fund and its preparation, as well as when a sinking fund forecast should be reviewed outside of the 5-year period.
To ascertain the funds needed, a sinking fund forecast is prepared – a detailed report of all elements of the building and common property requiring investment. This is usually renewed by a quantity surveyor every 5 years, but under some circumstances should be reviewed outside this cycle.
In this article, we cover the basics of a sinking fund and its preparation, as well as when a sinking fund forecast should be reviewed outside of the 5-year period.
What is a sinking fund forecast?
The general goal of the sinking fund is to allow the body corporate to pay for all capital improvements and replacements as they become due, without needing to either take a loan, or issue a special levy to owners.
The body corporate is required by law to have a detailed report of the elements of the building and common property that require investment. This is called a sinking fund forecast.
Think of the body corporate as a car driving down a dark road. The sinking fund forecast acts as its headlights, showing what will most likely be approaching in the next 10 years. This gives the body corporate enough time to speed up, slow down, or swerve around any oncoming obstacles.
The car never catches up to its headlights, but they are always revealing what lay ahead, just like the sinking fund forecast.
How is the sinking fund forecast prepared?
The sinking fund forecast is usually prepared by a quantity surveyor and includes an anticipated timeframe for the capital improvement and replacement of all elements of the scheme. For example, a fence replacement may be required in 10 years and pool resurfacing in 16 years.
The forecast considers each anticipated cost, its timeframe, inflation and any potential increases to produce a cash-flow recommendation. This is used to provide the suggested levy amount required each year by the sinking fund to meet these forecasted costs.
The legislation does recognise, however, that the body corporate may need to deviate from its sinking fund forecast by spending money out of sequence. For example, if a repair or replacement occurs faster or slower than predicted. Therefore it is recommended the sinking fund forecast be reviewed every 5 years.
The forecast considers each anticipated cost, its timeframe, inflation and any potential increases to produce a cash-flow recommendation. This is used to provide the suggested levy amount required each year by the sinking fund to meet these forecasted costs.
The legislation does recognise, however, that the body corporate may need to deviate from its sinking fund forecast by spending money out of sequence. For example, if a repair or replacement occurs faster or slower than predicted. Therefore it is recommended the sinking fund forecast be reviewed every 5 years.
How long should the body corporate be forecasting for?
The 10-year rule
As a minimum, the forecast should cover 10 years’ worth of predicted costs. This allows the body corporate 10 years to identify, plan and save for these future expenses.
As sinking funds are generally reviewed every 5 years, a quantity surveyor will prepare a 15-year plan to cover 5 annual budgets with a 10-year future projection.
As sinking funds are generally reviewed every 5 years, a quantity surveyor will prepare a 15-year plan to cover 5 annual budgets with a 10-year future projection.
When should a sinking fund be reviewed early?
After a cost deviation on a major project
The real cost of a project can often deviate from the sinking fund forecast’s anticipated budget. The quantity surveyor uses estimation to set the sinking fund forecast, where the real quoted project cost can be variable.
If work comes in over-budget, it will take money out of the sinking fund that has been allocated to other projects. This can have a significant impact on the sinking fund balance, depending on how much the actual cost deviates from the budgeted amount.
Any over or under-budget amount can throw the sinking fund off track for the remainder of the forecast period and the size of the project can magnify this effect.
For the sinking fund forecast to remain as accurate as possible, the body corporate should engage the quantity surveyor to update the sinking fund forecast, taking into account the actual cost of the large project, and re-calculating the levies accordingly – effectively re-setting the sinking fund target with this new information.
This is generally considered a ‘review’ of the sinking fund forecast rather than a new forecast, and is usually offered at a cheaper price than the full report.
The single largest cause of special levies for owners is when the sinking fund forecast is not accurate or the body corporate chooses not to follow its recommendations.
If work comes in over-budget, it will take money out of the sinking fund that has been allocated to other projects. This can have a significant impact on the sinking fund balance, depending on how much the actual cost deviates from the budgeted amount.
Any over or under-budget amount can throw the sinking fund off track for the remainder of the forecast period and the size of the project can magnify this effect.
For the sinking fund forecast to remain as accurate as possible, the body corporate should engage the quantity surveyor to update the sinking fund forecast, taking into account the actual cost of the large project, and re-calculating the levies accordingly – effectively re-setting the sinking fund target with this new information.
This is generally considered a ‘review’ of the sinking fund forecast rather than a new forecast, and is usually offered at a cheaper price than the full report.
The single largest cause of special levies for owners is when the sinking fund forecast is not accurate or the body corporate chooses not to follow its recommendations.
Any other time as decided by the committee
A committee can choose to review, or replace entirely, its sinking fund forecast at any time, depending on the spending limit of the committee.
While this may seem an unnecessary expense, consider the natural and economic turbulence Australia has experienced in the past 3 years – COVID, rising inflation, floods, bushfires, labour and material shortages. This has impacted the cost of capital improvement or replacement for all building projects.
Therefore, it may be advisable to consider replacing, or at least reviewing, the sinking fund forecast earlier than the 5-year threshold to ensure levies remain in line with forecasted costs.
For more information about how the body corporate sets its budgets and levies, read our article: Body Corporate Fees, Levies and Budgets – Your Complete Guide
While this may seem an unnecessary expense, consider the natural and economic turbulence Australia has experienced in the past 3 years – COVID, rising inflation, floods, bushfires, labour and material shortages. This has impacted the cost of capital improvement or replacement for all building projects.
Therefore, it may be advisable to consider replacing, or at least reviewing, the sinking fund forecast earlier than the 5-year threshold to ensure levies remain in line with forecasted costs.
For more information about how the body corporate sets its budgets and levies, read our article: Body Corporate Fees, Levies and Budgets – Your Complete Guide
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