People who are not familiar with the strata industry frequently ask this question. Most unit owners are aware that they pay levies to the body corporate or owners corporation (usually via the strata manager) but they sometimes do not understand where the money goes.
In most states of Australia contributions are levied from the owners of the strata lots (apartments, offices, warehouses, etc. depending on the type of building in which you own a strata lot) on behalf of two funds:
(a) the sinking fund (sometimes called a capital works fund) and,
(b) the administrative fund.
So what is the difference between these two funds?
The sinking fund accumulates the monetary contributions from the property owners to be set aside for the purpose of meeting long-term maintenance costs. To assist the body corporate to determine how much money should be set aside, Leary and Partners prepares a specialised report called a Sinking Fund Forecast (sometimes also called a Capital Works Plan or Maintenance Plan) for this purpose.
Typical expenses that are met from the Sinking Fund are: painting costs, replacement of major plant and equipment (e.g. air-conditioning plant, pool equipment, fire equipment, etc.), replacement of carpets, tiles, etc. Only expenses relating to the common areas of the complex can be met from the sinking fund.
The administrative fund on the other hand accumulates the contributions for the purpose of meeting short term expenses related to the common property – they are generally expenses that will occur within a twelve month period commencing from the begining of the financial year. Typically these expenses are of a sundry administrative nature and include accountants and other consultants fees (including the strata manager’s fees), electricity and water charges, insurance, taxation payments and sundry maintenance costs.
Although the administrative fund does cover maintenance costs they are limited in general to items with a short life cycle (generally less than twelve months). They include such items as pest control, sundry plumbing and electrical call-outs, sanitary services, cleaning, etc.