A new provision of the Strata Schemes Management Act 1996 came into effect in February 2005 (Section 75A). It requires the owners corporations of all new strata schemes, that is, those coming into existence from 7 February 2005 onwards to begin planning for their sinking fund needs for the following ten years.
This provision stipulates that the preparation of a 10-year plan of anticipated sinking fund expenditure is to commence at the first Annual General Meeting (AGM) of the owners corporation and is to be completed by the second AGM. The plan is to be reviewed and adjusted if necessary by no later than the fifth AGM.
Contributions are to be levied on lot owners in the scheme in accordance with the 10-year plan.
The main aim of the 10-year sinking fund plan provision is to assist owners corporations in building up sufficient financial reserves so that expensive capital expenditure can be paid for when needed. This will overcome the need to ask lot owners to pay large, one-off levies, any time a sinking fund expense arises.
Sinking funds are used to pay for such expenses as:
As an example, if an owners corporation calculates that it needs $120,000 over ten years, then it would need to levy $12,000 for each year. To meet the $12,000 per year need, contributions would be levied according to the unit entitlement of each lot. If there were 20 lots in the scheme and each had the same unit entitlement, each owner would be required to contribute $600 per year to the sinking fund. These calculations are of a general nature only and do not take account of circumstances where higher expenses may arise early in the 10-year period.
Owners corporations are required to have 10-year plans in place for the life of the scheme involved. When devising a 10-year plan, owners corporations may put the plan together themselves or engage outside experts to do the job for them. There are businesses that specialise in preparing sinking fund estimations but there is no obligation on owners corporations to use them. Some owners corporations may feel that they have sufficient internal expertise to carry out the task. It is a matter of choice for each scheme.
The 10-year sinking fund plan requirements on owners corporations explained above are now being extended to most other schemes. A Regulation was gazetted on 28 April 2006 which will gradually bring other strata schemes under section 75A of the Act. Schemes will be brought under the section in four phases, based on the scheme’s age (and thus its strata plan number).
Strata plan no. 50,000 and above (not including those already covered by Section 75A) will be required to commence 10-year sinking fund planning from 1 July 2006.
Strata plan no. 30,000 – 49,999 to commence from 1 July 2007.
Strata plan no. 10,000 – 29,999 to commence from 1 July 2008.
Strata plan no. 1 – 9,999 to commence from 1 July 2009.
This means that by the second AGM after the commencement date relevant to the strata plan number of the scheme, a 10-year sinking fund plan will have to be in place.
For example, if a strata scheme with a number in the 41,000s has its AGM on 1 August each year, it will be required to start its 10-year planning at its meeting of 1 August 2007 (in phase 2) and will need to have the plan completed and in place by its AGM of 1 August 2008.
Despite the commencement date relevant to the particular scheme, there is no impediment to owners corporations voluntarily commencing their 10-year planning arrangements earlier than required.
Some 2-lot schemes are not caught by the 10-year planning requirements so do not have to establish a sinking fund. Thus they will not be required to undertake 10-year sinking fund planning. Section 69 of the Strata Schemes Management Act 1996 provides that an owners corporation of certain 2-lot schemes is not required to establish a sinking fund. This applies to a scheme where the buildings within the lots are physically detached and no buildings are situated outside the lots within the scheme. If the owners corporation passes an unanimous vote then a sinking fund does not need to be set up.
While there are no penalties in the legislation for not complying with the 10-year plan provisions, a lot owner within a strata scheme would be able to apply to the Consumer, Trader & Tenancy Tribunal for an order instructing the owners corporation to meet its obligations.
Information about other aspects of strata schemes can be found in the following fact sheets:
Get a free copy of Adobe Acrobat Reader so you can access PDF versions of our information.