Every financial year the body corporate must adopt budgets for its administrative and sinking funds and set contributions to be levied for both of them. These funds have different purposes. The administrative fund is used to cover fees relating to maintaining and administering the scheme. These include body corporate management fees and insurance levies. The sinking fund is to cover up to 10 years’ worth of capital expenditure, such as needing to replace assets, undertake repairs, and other significant non-recurring major expenditure.
Money must be paid into the sinking fund if it is received in three ways: if the money was paid because it was levied by a notice of contribution; any amounts received under a policy of insurance for destruction of items of a major capital nature; and any interest from investment of the sinking fund. Anything else must go into the administrative fund. If the body corporate has enough money in its funds, then those monies can be invested.
Likewise, the sinking fund can only be used to pay for spending of a capital or non-recurrent nature, the period replacement of major items of a capital nature, and other spending that should reasonably be met from capital. Any other type of spending must be met from the administrative fund.
What is important is that the two funds must be kept separate. Transferring funds between the administrative and sinking funds are absolutely not allowed. This is because the administrative fund deals with the year-to-year expenses, whereas the sinking fund is designed to cover significant capital expenditure for at least 10 years. If any of these funds become insufficient, then a special levy must be raised to cover any shortfall.
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