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The importance of a Reserve Fund and new requirements as per the Act

By July 2, 2020November 12th, 2021No Comments

The amendments to the Strata Titles Act, which came into effect on 1st May 2020, introduced a new requirement for a designated Strata Company to establish a Reserve Fund.

A designated strata company is a scheme with 10 or more lots, a scheme that has a building replacement cost of more than $5,000,000 or a survey strata scheme with improvements to the common property to the value of $5,000,000 or more.

A Reserve Fund is a separate fund created and the levies of which the strata company contribute, are usually for major capital expenditure or unexpected items that may arise. Think of it as a savings account for your scheme.

What kind of items will the Reserve Fund Cover?

Examples of items which the Reserve Fund would cover (depending on the boundaries of the strata plan) are:

  • Painting of the building
  • New lifts or lift upgrade
  • Re-roofing
  • Resurfacing the driveway
  • Replacing common property i.e. new gutters and downpipes, replacement of flooring
  • Fence replacements
  • Improvements to the common property
  • Any unexpected expenses/emergencies

What are the benefits of having a Reserve Fund?

A Reserve Fund will;

  • Help the Strata Company meet the requirements of the new legislation
  • Equalise the contributions of old and new owners
  • Reduces the risk of special levies
  • Enhance resale values

Who needs to have a Reserve Fund?

ESM recommend that all Strata Companies have a Reserve Fund. However, it is a compulsory requirement for all designated strata companies to have a Reserve Fund.

How much should Strata Companies be raising towards our Reserve Fund?

The Act does not specify how much a Strata Company will need to raise towards the Reserve Fund. It’s important to note that the Strata Company must assess the needs of the scheme and adequately fund them.

To assist the Strata Company in determining a Reserve Fund, the strata company can use its 10-year maintenance plan as a guide in deciding how much to raise each year. The plan will include a list of certain works, when they need to be undertaken and the likely costs associated.

For larger, more complicated schemes, the strata company may wish to consider a Reserve Fund forecast to determine how much to contribute. Some of the building consultants who create the 10-year plans, incorporate this into their report.

Note: Reserve Fund levies can only be set as per the unit entitlement. The Act doesn’t recognise any other way of levying differently for Reserve Fund contributions.

What is a Reserve Fund Plan or Forecast? 

A Reserve Fund forecast is a document that estimates likely capital works around the strata complex, within a specific time frame, and then calculates how much to collect from lot owners to fund the works. It is also known as a Lifecycle Report.