Sinking fund and strata properties: What you need to know

What is a sinking fund?

In an apartment or townhouse complex, every owner pays strata fees. This money goes towards costs like strata insurance, fees to the strata management company, and ongoing maintenance.

A good owners' corporation should also put aside some money in a sinking fund to cover major upgrades or repairs, called capital works.

By regularly putting aside money in advance, a sinking fund ensures that property owners in a strata scheme don’t have to pay large, one-off levies whenever an expensive emergency cost arises.

Breaking down your strata costs

Property owners in a strata scheme must pay regular levies. These levies go towards two areas:

1. An administration fund. This fund is used to cover the cost of strata insurance, budgeted repairs, and to pay contractors to perform ongoing maintenance tasks (lawn mowing, gardening etc.)
2. A sinking fund. The money in a sinking fund is used to cover the cost of major capital works or emergency repairs.

Depending on where you live around Australia, a sinking fund may also be referred to as a maintenance plan or a capital works fund.

What expenses can sinking funds cover?

Sinking funds are much like a “rainy day fund” or savings plan for strata schemes. They ensure that when major capital works are required or emergency repairs need to be made to communal areas, the owners’ corporation has the funds ready.

Sinking funds can be used to cover expenses such as:

Are there any legal requirements around these funds?

Sinking funds are a legal requirement for strata schemes around Australia. Australian strata schemes are required by law to have a 10-year sinking fund plan in place.

These 10-year plans must also be in place for the life of the scheme, and the owners’ corporation must demonstrate how it is going to cover the cost of repairing and maintaining the common parts of the property.

Special levies

Owner's corporations can also raise funds for maintenance and repairs using special levies. For example, if the owners’ corporation anticipates that it will need $150,000 in a sinking fund over the next 10 years, it will need to levy $15,000 for each year.

If there are 25 apartment owners in the strata scheme, each owner would therefore have to pay an annual levy of $600.

"I'm on the committee for my strata complex. Luckily there have not been too many issues, as there's not much common property. But our fences are very old and starting to fall apart. While this cost will be shared by a few parties (individual lot owners with a backyard on the fence line, the neighbouring property, and the owners' corporation as a whole), it will certainly be expensive. We'll probably have to raise extra funds via a special levy."

Richard Whitten

Senior Money Editor

Important information about sinking funds

Keep the following tips and pieces of advice in mind when preparing or managing a sinking fund plan for your strata scheme:

• Buying a property. If you’re considering buying a property in a strata building, ask whether the owners’ corporation has a long-term sinking fund plan or maintenance plan in place. Is the plan reviewed regularly to ensure that it remains up to date with changing circumstances?
• Using the funds. If you have a project you think should be financed by the money in your strata scheme’s sinking fund, you will need to go through an approval process. In many cases, this will need to be put to the vote at an owners’ corporation AGM.
• Insufficient funds. If there is not enough money in the sinking fund to cover the cost of a project, a special levy may need to be raised. You will need to have support from the majority of owners and the corporation’s executive committee for this to occur.
• Older buildings are more expensive. As a general rule, the sinking fund for an older building will need to be larger than the fund for a modern building. This is because older buildings are more likely to need expensive repairs or works to update or upgrade facilities.
• Getting a plan prepared. If you own a lot in a strata scheme but the owners’ corporation does not have a 10-year sinking fund plan in place, you can apply to the tribunal in your state or territory that handles consumer and trader disputes. The owners’ corporation will then be issued with an order instructing it to meet its legal obligations.

Frequently asked questions

• What is the difference between a sinking fund and a savings account?

  A sinking fund is designated for a specific purpose, like major repairs or debt repayment, and is an account usually held for the interests of a group of people, such as owners of an apartment. Meanwhile a savings account can be for general savings or multiple goals.

• How much should be in a capital works fund?

  The amount in a strata sinking fund should be sufficient to cover future major capital expenses for the property. This is typically determined by a 10-year plan, accounting for estimated costs of repairs, maintenance, and replacements. The more features in the property, such as pools, lifts and common areas, and the larger the building is, the bigger the sinking fund should be.

• What is the sinking fund method?

  The sinking fund method involves regularly setting aside money into a fund to cover future expenses or debt repayments. This method ensures funds are available when large, predictable costs occur, such as major repairs or debt maturity.

• Are sinking funds a good idea?

  Yes, sinking funds are a good idea as they allow for the group accumulation of money over time to cover large, future expenses like property repairs or replacements. This reduces the financial burden on a group of owners, if and when those costs arise.

To make sure you get accurate and helpful information, this guide has been edited by Richard Whitten as part of our fact-checking process.

Written by

Tim Falk

Writer

Tim Falk is a writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio