NSW: Q&A Capital Works Fund – What Do We Need To Do Now?

These questions from NSW Lot Owners are about the capital works fund, previously known as the sinking fund.

Table of Contents:

• QUESTION: Are owners corporations required to have a capital works fund? Has new legislation been introduced in NSW allowing owners corporation to borrow money from the administration fund to pay for capital works?
• QUESTION: Many buildings are simply doing a tick and flick action of obtaining a sinking fund report. How do we ensure these inexpensive desktop approaches are a thing of the past?
• QUESTION: Can a Strata Committee make changes to a 10 Year Capital Works Plan that has been voted on and approved by the Lot Owners at an AGM?
• QUESTION: NSW legislation requires the preparation of a plan of anticipated major expenditure to be met from the capital works fund so why do plans always include maintenance costs which are not major?
• QUESTION: For 10 year capital works fund plans, the legislation is clear that an owners corporation “must review the plan at least once every 5 years.” So, what does it mean to “review” the plan? Can we just look at it on a page?
• QUESTION: We are looking at carrying out our own 10 year maintenance plan. Should we be doing this ourselves or should we talk to a professional?
• QUESTION: We have outstanding maintenance issues in our 1960s building and not enough funds. At our AGM, I raised the fact that we need a new capital works plan to detail the upcoming spending, but I was overruled. Do I keep pushing or take the matter to NCAT?
• QUESTION: We have a Financial Summary Proposal document, not an official Capital Works Fund schedule. Instead of obtaining a Capital Works Fund schedule, can we choose to do our own maintenance?
• QUESTION: Even though we requested a 10 year Capital Works Fund Plan as required by the legislation, we’ve been supplied a 15 year plan. Does this comply?
• QUESTION: Does the Owners Corporation have to pay sufficient money from levies into the Capital Works Fund? I have just discovered no money has been paid into the Capital Works Fund where I live for the last 3 years. Around 240 people live in the building.
• Capital Works Fund Definition
• QUESTION: How does the Capital Works Fund (previously Sinking Fund) work? [VIDEO]
• QUESTION: Is there a formula for setting strata levies to cover scheduled capital works and avoid a shortfall? We have identified a situation where projected levies will result in a shortfall.
• QUESTION: Could you please advise me if it is legal to have only one bank account for both the Administration and the Capital Works Fund?
• QUESTION: How do I get the executive to acknowledge obligations under the new legislation – have a 10 year plan, have it professionally costed, take steps to raise the required funds and commence overdue works?
• QUESTION: We don’t want an ‘out of the box’ 10 Year Capital Works Fund Plan. How do we go about incorporating our ideas like adopting sustainable energy options, installing charging facilities for owner’s electric cars into the plan?

Question: Are owners corporations required to have a capital works fund? Has new legislation been introduced in NSW allowing owners corporation to borrow money from the administration fund to pay for capital works?

Answer: In NSW, capital works funds are required by the Act to be established by owners corporations.

In NSW, capital works funds are required to be established under the Strata Schemes Management Act 2015 for strata schemes and under the Community Land Management Act 2021. You can resolve to use money from one fund for administrative fund purposes and not pay it back or only part pay it back.

Allison Benson
Kerin Benson Lawyers
E: allison@kerinbensonlawyers.com.au
P: 02 4032 7990

This post appears in Strata News #708.

Question: Many buildings are simply doing a tick and flick action of obtaining a sinking fund report. How do we ensure these inexpensive desktop approaches are a thing of the past?

Many buildings are simply doing a tick and flick action of obtaining a sinking fund report. What is your recommendation or the industries approach in terms of having a building physically assessed to identify the assets, their condition and the real costs that should be applied to the sinking fund. How do we ensure these inexpensive desktop approaches are a thing of the past?

Answer: If the Committee engages a company who does not accurately or suitably complete a CWFP by not attending site for example, the Owners Corporation will be liable for this decision.

You are quite accurate, many schemes have owners who simply accept a basic template Capital Works Fund Plan (CWFP) to simply meet legislative requirements and then it goes in the top drawer in someone’s desk never to be looked at again for 5 years until the review is due.

It is worth noting that if an owners corporation completes their own CWFP, they will hold all the liability associated with this. If they fail to appropriately budget for capital items, maintenance and repairs then they will be liable for any shortfalls or damages to owners. There have been many cases where an owner has successfully sued an Owners Corporation for failing their legal duty to keep the common property in good order and manage maintenance and repairs. These lawsuits have been in the hundreds of thousands.

Similarly if a Strata Committee engages a company who does not accurately or suitably complete a CWFP by not attending site for example, the Owners Corporation will be liable for this decision. Similarly, if an issue arises such as a shortfall or missed maintenance planning, the company that completed the desktop report would share some liability (hopefully with professional indemnity insurance) but you’re relying on the fact that that company will still be around and able to contribute towards the claim.

Engaging suitably qualified tradesperson and contractors is the responsibility of the Owners Corporation. Just like you would not send a handyman to change your switchboard, you would not send someone inexperienced to complete your CWFP.

To make desktop CWFPs or owner created CWFPs a thing of the past, greater education is needed for owners and committee members on how much liability surrounds the duty to maintain a strata scheme. If owners truly know the liability around taking this onboard themselves, no one would opt to have a basic, poorly created CWFP in their name.

Dakota Panetta
Solutions in Engineering
E: dakotap@solutionsinengineering.com
P: 1300 136 036

This post appears in Strata News #591.

Question: Can a Strata Committee make changes to a 10 Year Capital Works Plan that has been voted on and approved by the Lot Owners at an AGM?

At our AGM, the 10 year maintenance plan, along with the details of how it will be implemented and the annual projects listed in chronological sequence over the 10 years was approved by the Lot Owners. Three months later, two new members on the Strata Committee are looking to change the chronological listing of the projects and the proposed project items that had been budgeted for. Can the Strata Committee make alterations to the agreed 10 Year Capital Works Plan?

Answer: The strata committee will likely recommend amendments and prioritisation to the owners corporation for its approval by ordinary (majority) resolution.

Only an owners corporation may, by resolution review, revise or replace a 10-year plan and the owners corporation is obliged to review it at least once in every 5 years. Your subject 10-year plan must be finalised by the end of the next AGM, which is likely why the strata committee is now scrutinising it, to ensure its accuracy. The strata committee will likely recommend such amendments and prioritisation to the owners corporation for its approval by ordinary (majority) resolution.

Leanne Habib
Premium Strata
E: info@premiumstrata.com.au
P: 02 9281 6440

This post appears in Strata News #589.

Question: NSW legislation requires the preparation of a plan of anticipated major expenditure to be met from the capital works fund so why do plans always include maintenance costs which are not major?

Section 80 of the NSW legislation requires the preparation of a plan of anticipated major expenditure to be met from the capital works fund so why do plans always include maintenance costs which are not major and historically are to be charged to the Administration Fund?

Answer: A Capital Works Fund Plan serves the purpose in assisting a strata scheme to financially plan for the expected maintenance/replacement of capital works of a non-recurrent nature.

Items of a non-recurrent (greater than 12 month frequency) capital nature should make up a Capital Works Fund Plan. A Capital Works Fund Plan serves the purpose in assisting a strata scheme to financially plan for the expected maintenance/replacement of capital works of a non-recurrent nature. These items may fall due for replacement in 30- 50 years.

Like getting a car serviced when due, by maintaining these items they will serve their purpose better and last longer. For items of a recurrent nature, such as regular garden/ lawn maintenance, pool cleaning etc., these would be paid out of the administrative fund and should not form part of a Capital Works Fund Plan.

Dakota Panetta
Solutions in Engineering
E: dakotap@solutionsinengineering.com
P: 1300 136 036

This post appears in Strata News #582.

Question: For 10 year capital works fund plans, the legislation is clear that an owners corporation “must review the plan at least once every 5 years.” So, what does it mean to “review” the plan? Can we just look at it on a page?

Answer: The 5 year review requires a new 10 year plan (commonly a 15 year forecast) to be put in place.

There are two main points:

1. A new plan must be prepared for a 10 year period following the expiry of each prior plan.
2. Each plan must be reviewed at least once every 5 years.

Commonly, Quantity Surveyors prepare a 15 year plan or forecast to ensure the owners corporation complies with the legislation by always having a 10 year future plan in place prior to the 5 year review. The 5 year review requires the process to be undertaken again and a new 10 year plan (commonly a 15 year forecast) put in place. The most important factor being that you have always budgeted for 10 years into the future.

Additionally the plan must include:

1. details of proposed work or maintenance;
2. the timing and anticipated costs of any proposed work;
3. the source of funding for any proposed work;
4. any other matter the owners corporation thinks fit.

Zac Gleeson
GQS
E: zac@gqs.com.au
P: 0419 755 896

This post appears in the June 2022 edition of The NSW Strata Magazine.

Question: We are looking at carrying out our own 10 year maintenance plan. Should we be doing this ourselves or should we talk to a professional?

I’m one owner of a 2 lot Strata that have just started self managing our scheme. We are looking at carrying out our own 10 year maintenance plan. Should we be doing this ourselves or should we talk to a professional? What are the benefits of getting a professional to assist?

If we decide to carry out the plan ourselves, is there a sample or template Ten Year Capital Works Fund Plan that gives us an idea of how to do proceed?

Answer: We strongly recommend engaging the services of a professional.

Legislatively there is nothing stopping you from preparing the 10 Year Capital Works Fund Plan yourselves. I am not aware of any templates as most would consider IP of the preparer. We do however, strongly recommend engaging the services of a professional.

It is an intricate exercise and requires many years of experience to accurately reflect the future liabilities of the fund. We consider capital works not only within the ten years as required, but also beyond this timeframe to ensure consideration of such expenses by current lot owners. It is also standard practice in the market to produce a 15 year plan so that the report has a 5 year shelf life whilst still complying with the legislation.

It is important to consider escalation, tax and interest factors over the lifetime of the ten year plan. Sharp increases in construction costs or specific materials can dramatically affect the health of the capital works fund now and into the future, as we have seen recently all across the country.

We, like many others, complete thousands of forecasts per year. The data from this enables us to accurately estimate future works of a similar type, location and scope to those that your property will require now and into the future.

At the end of the day engaging a professional ensures peace of mind and an accurate result. As the SCA states, the purpose of a 10 year capital works fund plan is to ensure sufficient financial reserves are built up to avoid lot owners having to pay large, one-off levies that may cause financial strain. It is our role, or that of another suitably qualified Quantity Surveyor, to ensure the Capital Works fund is sufficient to meet future capital works of the property.

Zac Gleeson
GQS
E: zac@gqs.com.au
P: 0419 755 896

This post appears in the May 2022 edition of The NSW Strata Magazine.

Question: We have outstanding maintenance issues in our 1960s building and not enough funds. At our AGM, I raised the fact that we need a new capital works plan to detail the upcoming spending, but I was overruled. Do I keep pushing or take the matter to NCAT?

My unit is in a 3 story brick strata building with 11 lots that was registered in 1960. The building is mostly in its original condition, and many structures are in need of replacement eg windows and plumbing.

At our AGM last month, I raised the fact that we need to do a proper review of our Capital Works Plan but was overruled by the other members of the committee. The current plan was done in 2019 at a cost of $300 and was an ‘off-the-shelf’ job that has completely omitted the window and plumbing stack replacement. We have around $100k in our fund, not enough to fund work, but a good start.

How should I proceed? Am I best to keep pushing for a review of the capital works plan, or should I take the window replacement issue straight to NCAT?

Answer: The act is not optional. If maintenance is required and is not done and damage or harm is the result then each and every owner faces an unlimited liability.

Sedgwick would recommend wherever possible trying to come to a resolution outside of NCAT as there are expenses that will apply to both parties if this route is followed and this needs to be considered.

As noted above the course of action being referenced is not necessarily the best way forward. The suggestion that the Owners Corporation need to re-do their 10-year plan for the Capital Works Fund will not necessarily generate the desired outcome being sort. Even if successful, the result would be a new plan, costing another $300 spent and not necessarily the replacement / repair of the property. The new plan may simply put the windows and plumbing stack replacement in the 10th year.

The best place to started is the Strata Schemes Management Act 2015, paraphrasing;

1. Section 79 says

   1. that each year at the AGM, the Owners will vote on and estimate how much money it will need to credit to its administrative fund for actual and expected expenditure
   2. The estimate of expenditure must include to maintain in good condition on a day-to-day basis the common property

The windows are common property.

2. Section 106 and in particular 106 (1) says

   1. An owners corporation for a strata scheme must properly maintain and keep in a state of good and serviceable repair the common property, and
   2. Accepting that Section 106 (3) allows for a special resolution (which does also have its own definition) to not perform maintenance if it is inappropriate to do so and if the decision will not affect safety.

Then the questions that the AGM should have answered are;

1. Are the windows and the plumbing stack to be maintained (this would have been agreed, as stated the windows are common property, and to not maintain them would be a safety issue) a vote as negative could be set aside by NCAT.
2. Therefore the next question is when they should be repaired / replaced
   
   • this year or
   • scheduled within the 10-year plan

and then budgeted for in the same way.

From a risk mitigation point of view this question should be carefully considered. If the windows are in a dangerous condition and there is an imminent risk of danger that can easily be determined, the result should most certainly be to repair or replace ASAP. To not do so exposes all members to unlimited liability in relation to harm or damage to others.

The other concern is the $100k balance in the sinking fund. The Act is explicit in that if there are insufficient funds and the work must be done, the Owners corporation must fund and complete it. Funding options would include

• special levies or
• an unsecured loan

The act is not optional here. If maintenance is required and is not done and damage or harm is the result then each and every owner faces an unlimited liability.

Beyond the above Sedgwick would recommend the engagement of a suitably qualified Building Consultant to assist with providing a Scope of Works and a Quantity Surveyor to provide a Cost Estimate to establish the full extent of the work and associated expense of the remedial repairs as the next step in addressing the issues identified.

Scott Driscoll
Sedgwick Building Consultancy division
E: scott.driscoll@au.sedgwick.com
P: 0409 632 003

This post appears in Strata News #558.

Question: We have a Financial Summary Proposal document, not an official Capital Works Fund schedule. Instead of obtaining a Capital Works Fund schedule, can we choose to do our own maintenance?

All 5 owners of our Strata Plan are on the Owners Corporation. Our Strata Plan has a 2017 Financial Summary Proposal document, not an official Capital Works Fund schedule. This Financial Summary Proposal document was put together remotely, not via a visit on site, and is not in sync with reality. It proposes maintenance/replacement in the future of items that are already falling apart. 

I have sent a proposal requesting the Owners Corporation pay an experienced builder to write a Capital Works Fund schedule. Our Strata Manager obtained a quote for $750. I am suspecting it will be voted no despite all owners agreeing that the existing document is out of date. The Owners Corporation simply doesn’t want to spend money. 

I have repeatedly explained it is the legal requirement of the Owners Corporation to maintain and fix things and now 2 owners are taking it upon themselves to repair items which they expect the builder will put on the capital works fund list (eg. repair a retaining wall that was quoted at $15,000 by a qualified builder). 

What do I do if my proposal to have a proper Capital Works Fund schedule drawn up is voted down? How do I stop owners doing major repairs themselves?

Answer: The Act requires all Owners Corporations to establish a capital works fund plan.

The Legal requirement

In October 2015, the NSW Government implemented the new and revised Strata Schemes Management Act 2015. This Act requires all Owners Corporations to establish a capital works fund plan. A capital works fund plan (CWFP) sets out all anticipated major expenditure. The legislation recommends the report be updated at least every 5 year (See s80(3) of the Act). So clearly there is a legal requirement to have a CWFP and this cannot be voted down.

Preparing a CWFP allows an Owners Corporation to predict and budget for the future maintenance of their property. This allows an Owners Corporation to ensure that they have enough money saved to cover the cost of major works, such as repainting the property or roof repairs, without having to raise a special levy or having to cut back or defer other maintenance work. Having these funds available in turn ensures that the Owners Corporation can properly maintain the building(s) and grounds, preserving the value of each unit and the property as a whole.

The Plan must include all anticipated, major expenses to be paid from the capital works fund over the following 10 years. Once the CWFP has been prepared, the Owners Corporation must refer to it when developing its budget and setting the capital works fund levy each year, under section 79(5) of the Act. The Owners Corporation must consider what work is needed to maintain the property, the CWFP provides a guide to this and the likely associated costs.

Who Should Prepare the CWFP?

While the basic principles of CWFP are quite simple, few individuals have the breadth or depth of experience to accurately assess the state-of-repair of the vast range of fixtures and fittings in most buildings, estimate their lifespan and then predict their maintenance and/or replacement cost over 10 years. Fewer still have the time to research all these issues. I would not do my own CWFP for my scheme purely because of the risk of litigation should I get something wrong. Plus, the owners corporation’s insurance will not cover or protect me from being sued by a disgruntled owner who believes I have not allowed for the correct funds to meet the outgoings for capital works.

Therefore, it makes good sense to only use correctly insured fully trained building industry professionals with decades of experience in property maintenance. That have access to a vast, continuously updated knowledge-bank of maintenance trends, costs and techniques designed to maximise the lifespan of your property.

I hope this answers all your queries but of great concern is owners undertaking the works themselves. Check with your strata insurer to find out what risk they are bringing on themselves and possible breaches of the owners corporations insurance policy.

Peter Berney
Solutions in Engineering
E: peter@solutionsinengineering.com
P: 1300 136 036

This post appears in the July 2021 edition of The NSW Strata Magazine.

Question: Even though we requested a 10 year Capital Works Fund Plan as required by the legislation, we’ve been supplied a 15 year plan. Does this comply?

Answer: A 15 year plan simply provides more information than a 10 year plan, it will not impact the quantum of the levy or the cost of the report.

Section 80 Owners corporation to prepare 10-year capital works fund plan

1. An owners corporation is to prepare a plan of anticipated major expenditure to be met from the capital works fund for a 10-year period commencing on the first annual general meeting of the owners corporation.

3. An owners corporation may, by resolution at a general meeting, review, revise or replace a 10-year plan prepared under this section and must review the plan at least once every 5 years.

Given the information supplied, the 15 year plan mentioned appears to be a plan under subsection (1). If a 10 year plan is provided, then it will be a 9 year plan after 1 year and so on. Owners are required to review their 10 year plan every 5 years – which means they will only have a 5 year plan at that stage. So to avoid annual reviews and to maintain a 10 year plan at all times – a 15 year term is selected.

A 15 year plan simply provides more information than a 10 year plan, it will not impact the quantum of the levy or the cost of the report.

I trust that the above is of assistance, however should any further information be required please do not hesitate to contact the undersigned.

QIA Group
E: info@qiagroup.com.au
P: 1300 309 201

This post appears in Strata News #473.

Question: Does the Owners Corporation have to pay sufficient money from levies into the Capital Works Fund? I have just discovered no money has been paid into the Capital Works Fund where I live for the last 3 years. Around 240 people live in the building.

Answer: Yes, the Owners Corporation must pay funds into the capital works fund in accordance with the amounts set in its capital works fund plan.

Yes, the Owners Corporation must pay funds into the capital works fund in accordance with the amounts set in its capital works fund plan.

In your case, it may be that no capital works funds were anticipated as being required over the last 3 years.

See extracts of the legislation below:

74 Capital works fund

1. Establishment of fund An owners corporation must establish a capital works fund.
2. Amounts payable to fund An owners corporation must pay the following amounts into the capital works fund:

   1. the contributions levied on, and paid by, owners for payment into the fund,
   2. any amounts paid to the owners corporation by way of discharge of insurance claims, unless paid into the administrative fund,
   3. any amounts paid to the owners corporation under Part 11,
   4. any amount received by the owners corporation that is not required or permitted to be paid into the administrative fund,
   5. the proceeds of any investment of the fund.

3. An owners corporation may also pay the following amounts into the capital works fund:
   
   1. any income of the owners corporation,
   2. any amount that may be, but is not required to be, paid into the fund under this Act.

4. Amounts payable from fund An owners corporation may pay money from its capital works fund only for the following purposes:
   
   1. payments of the kind for which estimates have been made under section 79 (2),
   2. payments made in accordance with this Division on a distribution of a surplus in the fund,
   3. payments of amounts for the purposes of Part 11,
   4. the transfer of money to the administrative fund or to pay expenditure that should have been paid from the administrative fund.
5. Exemption An owners corporation for a strata scheme comprising 2 lots need not establish a capital works fund if:
   
   1. the owners corporation so determines by unanimous resolution, and
   2. the buildings comprised in one of those lots are physically detached from the buildings comprised in the other lot, and
   3. no building or part of a building in the strata scheme is situated outside those lots.

Section 80 Owners corporation to prepare 10-year capital works fund plan is also relevant.

Leanne Habib
Premium Strata
E: info@premiumstrata.com.au
P: 02 9281 6440

This post appears in Strata News #436.

According to Strata Community Association (NSW), here is the Capital Works Fund definition:

• Previously known as the Sinking Fund. This fund is established by strata schemes to meet anticipated major expenditure. A 10-year Capital Works Fund must be:
  
  • prepared;
  • reviewed in five (5) years;
  • discussed and implemented annually at each AGM.

How does the Capital Works Fund (previously Sinking Fund) work?

For a detailed explaination, take a look at this video by Michael Ferrier, Eyeon Property Inspections.

Question: Is there a formula for setting strata levies to cover scheduled capital works and avoid a shortfall? We have identified a situation where projected levies will result in a shortfall.

Our 10 year Capital Works Fund Plan identifies a situation (in year 3), where our CW funding will fall below our projected levy income. Some costly items scheduled in the future exacerbate this situation still further, maintaining us in the red long term.

It would seem unreasonable to be required to raise repeated special levies each time a major CW item needs to be undertaken. Is there a prudent ‘rule of thumb’ that can be applied to determine an acceptable gross annual levy and if so, what are the parameters best used to determine its value.

Is there a pragmatic Capital Works Find contingency amount (in percentage terms of annual expenditure), that would be considered sensible.

I am aware that we cannot take monies from the Administration Fund to subsidise Capital Works, although there are provisions for a 90 day grace period. Is there an accepted ratio for allocating the monies raised through standard levies, and/or is the ratio set by the strata at their AGM?

Answer: There is no accepted ratio for the determination of funds to be raised.

There is no set “prudent” amount or accepted ratio for the determination of funds to be raised.

For the purposes of the capital works fund you should engage a quantity surveyor or valuer to professionally determine projected funds required. The surveyor/valuer will prepare a 10 year plan to assist in determining funds required to meet anticipated expenditure.

Leanne Habib
Premium Strata
E: info@premiumstrata.com.au
P: 02 9281 6440

This post appears in Strata News #321

Question: Could you please advise me if it is legal to have only one bank account for both the Administration and the Capital Works Fund?

I have just been appointed as Treasurer of our Strata.

Could you please advise me if it is legal to have only one bank account for both the Administration and the Capital Works Fund?

I’ve found the following information on the NSW Fair Trading’s page: Levies and capital works funds.

Funds

All strata schemes must establish an administrative fund and a capital works fund to administer the finances of the strata scheme. This includes managing any interest earned from investing the moneys of these two funds.

Does this mean there always has to be two separate funds, one for each account?

Answer: It’s common to only have one bank account. The balance sheet shows what amounts are attributable to each fund.

Andrew Terrell
Bright & Duggan
E: Andrew.Terrell@bright-duggan.com.au

This post appears in Strata News #311.

Question: How do I get the executive to acknowledge obligations under the new legislation – have a 10 year plan, have it professionally costed, take steps to raise the required funds and commence overdue works?

At its last AGM, my strata’s executive chose not to engage the services of a specialist consultant to establish a 10 year sinking fund plan. As a result, there is neither a plan nor any budget to conduct necessary maintenance.

Our strata’s sinking fund is obviously not well enough funded and either a levy increase (but more likely a special levy), is required to allow overdue activities to be adequately funded without spending every last cent in our sinking fund.

How do I (a new arrival), get an entrenched and highly resistant executive to acknowledge their obligations under the legislation, to have a 10 year plan, have it professionally costed and take immediate steps to raise the required funds to support it as well as commence overdue works?

Finally, is there a practical minimum (percentile of revenue), that a sinking fund should maintain for contingencies?

From Will the New Reform Mean that Owners Corporations Will Now Raise Money to Match their 10 Year Sinking Fund Plan? – David Bannerman, Bannermans Lawyers:

Under the current legislation, there is a requirement for owners corporations “to take into account” the 10 year capital works plan. Many schemes do not comply with this obligation in good faith with the result that the capital works fund remains just as underfunded as it was before 10 year plans were required.

The new legislation seeks to make it harder for those schemes to completely ignore their 10 year plan when it comes to having money in the bank by:

• Importantly, requiring the plan to include:
  
  1. details of proposed work or maintenance,
  2. the timing and anticipated costs of any proposed work,
  3. the source of funding for any proposed work,
  4. any other matter the owners corporation thinks fit,
  5. any other matter prescribed by the regulations for the purposes of this section.

• A requirement for schemes to implement the plan in so far as is practicable.

Answer: It is mandatory for an Owners Corporation to have a 10 year capital works fund on file and must review the plan at least every 5 years.

The sinking fund is now referred to under the new legalisation as the Capital Works Plan.

It is mandatory for an Owners Corporation to have a 10 year capital works fund on file and must review the plan at least every 5 years. This is a requirement under Section 80 of the Strata Schemes Management Act 2015.

There is no obligation of the Owners Corporation to adopt and raise the recommended levy capital works fund contribution, although it is now a requirement under the new legalisation to set out the 10 year proposal plan in the Section 184 Certificate which is a Certificate issued by an Owners Corporation in relation to financial and other matters relating to a lot and usually requested for settlement purposes when a lot is being sold.

This will provide purchasers with assistance in determining if an Owners Corporation is not raising adequate funds to the capital works fund.

Section 74 of the Strata Schemes Management Act 2015 requires an Owners Corporation to establish a capital works fund and determine on an annual basis amounts payable to this fund to assist with the expenditure of capital works.

The Acts refers to an exemption for a two lot scheme, Section 74 (5) states

5. Exemption An owners corporation for a strata scheme comprising 2 lots need not establish a  capital works fund  if:
   
   1. the owners corporation so determines by unanimous resolution, and
   2. the buildings comprised in one of those lots are physically detached from the buildings comprised in the other lot, and
   3. no building or part of a building in the strata scheme is situated outside those lots.

In summary, there is no obligation on how much funds should be raised to the capital works fund (formerly referred to as the sinking fund) however the Act is clear in that a capital works fund must be established and amounts of contribution to the capital works fund must be determined annually. In addition, it is a requirement to have a capital works fund plan on file for consideration which must be reviewed every 5 years.

A lot owner may apply to the tribunal if the Owners Corporation are not meeting their obligations under Section 80 and 74.

Leanne Habib
Premium Strata
E: info@premiumstrata.com.au
P: 02 9281 6440

This post appears in Strata News #127

Question: We don’t want an ‘out of the box’ 10 Year Capital Works Fund Plan. How do we go about incorporating our ideas like adopting sustainable energy options, installing charging facilities for owner’s electric cars into the plan?

Our strata have recently had a 10 Year Capital Works Fund Plan prepared by a consultant. It includes most of the practical considerations our strata committee (and any future managing agent) will need to consider and fund during the forthcoming decade.

It is evident that the plan has been based on the consultant’s Capital Works template as there is very little about its projected repairs and maintenance that our particular to our building and grounds. Neither does it reflect any improvements to the property that most owners would consider desirable in the plan’s extended timeframe.

There is solid evidence that adopting alternative and sustainable technologies like solar panels and battery storage, combined with the latest and most energy efficient fittings significantly reduces operating overheads. New purchase plans also reduce initial capital expenditure, plus following a forever shortening payback (break-even) periods actually returns financial savings well within the 10-year scope of the plan. Initiatives that, in addition to the desirable medium-term savings on operating expenditure, also upgrade outdated and inefficient common property to current technology that adds value to each unit owner’s investment.

Before the Capital Works plan goes to our AGM what is the best way to have inclusions like adopting sustainable energy options, installing charging facilities for owner’s electric cars, replacing inefficient (and costly) lighting and air-conditioning in common areas, installing rainwater tanks and other desirable cost-saving environmental upgrades to ageing infrastructure so our plan can reflect reality rather than a formula.

Answer: The items mentioned e.g. sustainable energy options, installing charging facilities for owner’s electric cars etc should have been included in the Capital Works Plan.

Capital Works Funds were introduced via revisions to the Strata Schemes Mgmt. Act on the 30th November 2016 and specifically states that the owners can have any items of their consideration included in the Capital Works Fund. They replace the Sinking Fund Plan which required a Plan of anticipated major expenditure… over the 10-year period” This is pretty broad and could be thorough or very simple. The new requirements under the Strata Schemes Management Act 2015 s 80 still require a “Plan of anticipated major expenditure… over the 10-year period” but now must include:

• Details of the work
• Timing and anticipated costs
• Source of funding
• Anything else you want
• Owners Corporation must attempt to implement the plan

For the first time, the law is specific about what a Capital Works Fund Plan must contain, and; that it MUST be implemented. This weeds out the miser owners & lazy Capital Works Fund report operators. A precise list of expenses, with timing included e.g. replace water pumps – $4,218 in three years’ time, $4,766 in seven years, $5,385 in eleven years, etc. For each expense, list how the expense is calculated:

• Size or quantity of item
• Rate to maintain/replace
• Anticipated lifespan
  
  • New non-recurrent expenditure, tailored to the property e.g. upgrade to a more impressive foyer, replace Linoleum with Calcutta pearl marble etc.

It should be tailored to the building in other ways:

• Age
• Type of construction
• Environment
• Construction technique
• Recent sinking fund expenditure
• Existing issues/defects

Most of this information needs to come from the person who knows the most about the building e.g. the Treasurer or Building Manager and they should try to meet with the inspector onsite before the inspection commences to impart this knowledge and furnish the professional inspector with as much property information as possible. This will help ensure a more accurate report upon completion. That said, the items mentioned e.g. sustainable energy options, installing charging facilities for owner’s electric cars, replacing inefficient (and costly) lighting and air-conditioning in common areas, installing rainwater tanks and other desirable cost-saving environmental upgrades to ageing infrastructure should have been included in the Capital Works Fund Report.

If it’s not too long since the report has been received by the strata committee, then they may be able to request that the report is amended to include these items or worst case scenario the may be an administrative fee to amend the report. Remember you usually get what you pay for, so when looking to enlist the services of any contractor ensure that the strata committee take into consideration their experience, length of time in business, are a member of the industry body ‘Strata Community Association’ in your state/territory and most importantly not just accept the cheapest quote.

Happy to answer any further queries and to finish up in summary:

• Capital Works Fund Plan must have details of proposed works/maintenance
• Relevant timing/anticipated costs of works/maintenance
• The source of funding for proposed works/maintenance
• Can include any works/maintenance item the Owners Corporation sees fit to add
• Include any matter prescribed by the Reg’s for this purpose
• The scheme must implement the CWFP as far as is practicable

Peter Berney
National Business Development Manager
Solutions in Engineering
E: peter@solutionsinengineering.com
P: 1300 136 036

This article is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.

This post on appears in Strata News #155.

Have a question about the capital works fund or something to add to the article? Leave a comment below.

Read next:

• NAT: Finding Caretaking Solutions – Common Property Condition Reports

This article is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.

Are you interested in more about capital works funds or information particular to NSW legislation? Visit Your Strata Levies OR NSW Strata Legislation

Looking for strata information concerning your state? For state-specific strata information, take a look here.

After a free PDF of this article? Log into your existing LookUpStrata Account to download the printable file. Not a member? Simple – join for free on our Registration page.