Sinking funds

24 Sep Sinking Funds – Forecasts & Budgeting

Sinking Funds – Forecasts & Budgeting

Under Section 139(1) of the Body Corporate and Community Management (Standard Module) Regulation 2008, it states:

The body corporate must, by ordinary resolution, adopt 2 budgets for each financial year –

a. The administrative fund budget

b. The sinking fund budget

For the purposes of this article we are interested in the Sinking Fund Budget only.

Section 139(3) goes on to explain that the Sinking Fund Budget must allow for raising a reasonable capital amount both to provide for necessary and reasonable spending from the sinking fund for the financial year and to also 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 having regards to items further set out in this section.

In the Adjudicators Order reviewed this month, one of the issues raised by the application was that the sinking fund budget should be found void because it failed to reserve sufficient funds towards anticipated future expenditure and sought further orders that a new sinking fund budget be considered based on a sinking fund forecast prepared by Leary & Partners this year rather than being increased by 2% from last years levies.

It was noted that the applicants main concern with the sinking fund budget proposed fails to raise enough money to meet anticipated expenditure over the next 9 years after the present financial year and was based on the previous sinking fund forecast which has not taken into account replacement of the roofing membrane, which has been noted as a possible expense in 2021 or 2024 plus repainting expense forecast in 2023.

The adjudicator, in reviewing all of the information provided and the applicants submission, noted that the body corporate is under no obligation to have a professional sinking fund forecast prepared or to base its sinking fund budget upon it. It is only under obligation to prepare a sinking fund budget each financial year that, in accordance with section 139(3) of the Standard Module allows for raising a reasonable capital amount both to provide for necessary and reasonable spending from the sinking fund for the financial year and 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….

The adjudicator further noted that based on the previous Sinking Fund Forecast and the sinking fund budget passed at the last AGM – there appears to be no correlation between the 2 documents and felt that it would appear that the body corporate is no longer relying on this document, however has made mention of the comment from the applicant that the budget was increased by 2% from the previous years budget. The adjudicator noted that if it is the current practise of the committee to consider increase in the levies in line with “inflation” – it is incorrect and must be rectified in future.

As the end of the financial year was approaching and as the levies had all been issued, the adjudicator ruled that it would not make sense to invalidate the sinking fund budget at this stage and order an EGM be called to consider new budgets and contributions, however if the body corporate departs from the recommendations of the new forecast moving forward, it will need to be able to articulate a sensible basis for doing so if challenged by the applicants or other concerned owners.

The full order can be read – http://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/qld/QBCCMCmr/2019/386.html

Further information on both Administrative Fund & Sinking Fund Budgets can also be found on our website. Check out our Fact Sheets – https://www.hlss.co/resources/fact-sheets/

And by visiting the Commissioners Office Website – https://www.qld.gov.au/law/housing-and-neighbours/body-corporate/finance-insurance/funds/sinking

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