When should you reduce your sinking fund levies?

A good sinking fund forecast gives a body corporate confidence to plan its capital expenditure over time knowing that the funds will be there when items need to be repaired or replaced.

However, there are times when the sinking fund itself can get so large it might be inappropriate to keep the levies at a level. Sinking fund forecasts are rarely followed to the letter and items will get deferred until the committee feels the work is really needed; fluctuations in price of materials will also affect the accuracy of predictions made three, four or five years ago; and sometimes levies are set at a level to allow for a large expenditure at a point and are then maintained at that level after the work is complete.

Any of these can lead to a large, cash rich, sinking fund with low anticipated expenditure in the short and medium term. At what point is it appropriate for the committee to reduce levies and to what extent should it be considered?

The setting of sinking fund levies can seem like a simple matter. However, adopting too low a figure might create problems in the future including the need to raise special levies. If too high, then the levies might reach a level that prove unattractive to potential investors while the body corporate sits on a fund that simply accrues interest.

The setting of the levy in the sinking fund forecast must take into account:

1) Anticipated and provisional expenditure

2) The nature of the building

3) The age of the building

4) Recent work

5) Changing costs of work and materials

The person who prepares the sinking fund forecast will make a recommendation but this is open for discussion and the approval of the committee. Each building is different and there is no magic number at which to set the levy. Over time the committee, with the advice of experts will get a feel for the level of funds required.

The other side of the levy setting coin is the reaction of lot owners. As much as they will be delighted with a 30% decrease in one year, they might not be so pleased with a 30% increase the following year (even though they will not be paying as much as the year before) if you find levies need to increase again.

It is always best to err on the side of caution and have a fall back in case of unpredicted expenses. Therefore, when it comes time to reduce the levies, it might be sensible to reduce incrementally rather than reduce too much and then have to raise again.

The most important thing to do is to engage an experienced professional to provide your sinking fund. One who is willing to engage in a conversation with the committee to ensure that you have the best and most appropriate levies set to protect all lot owners.

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