Guidelines for maintenance and sinking fund expenses in strata properties

Guidelines for maintenance and sinking fund expenses

     Table of Contents

      (1) Objective

      (2) Background

      (3) Strata Management Act 2013

      (4) Duties of MC concerning accounts

      (5) Reply from Authorities

      (6) Statutory provisions for maintenance and sinking fund accounts

      (7) Capital expenditure

      (8) Depreciation

      (9) Examples of MF and SF expenses

      (10) Principles into practice

(1) Objective

This document aims to offer guidance on which expenses should be charged to the maintenance and sinking fund account. This guide has been created to facilitate a better comprehension of expenses and serve as a reference for further discussions.

(2) Background

The practice of using the maintenance account to pay for all expenses in one strata development prompted a review of the expenses. This led the management to separate the expenditures following the provisions of the Strata Management Act 2013. The goal was to ensure proper recording of expenses.

(3) Strata Management Act 2013

The Strata Management Act 2013 (SMA) governs the management of the common properties of strata title developments in Peninsular Malaysia and Federal Territory of Labuan. The law has been in effect since June 1st, 2015. The Act covers a wide range of issues related to communal living and management, and the Commissioner of Buildings (COB) is responsible for ensuring that these issues are addressed per the law.

(4) Duties of management corporation concerning accounts

Section 62 (1): A management corporation shall in respect of the maintenance account and sinking fund account –

(a) Cause to be prepared such accounts and records of accounts and enable true and fair balance sheet, income and expenditure statement and profit and loss statement to be prepared for the period starting from commencement of the preliminary management period;

The building maintenance expenses figure in the audited account must be correct, ensuring it contains the correct expenses. If sinking fund expenses are charged there, the figure would be higher than it should be.

Note: Continuously charging all sinking fund expenses into the maintenance account can trigger an increase in owners’ monthly service charges.

Owners unfamiliar with sinking fund expenses would not know if the audited report does not state that these expenses are embedded in the building maintenance expenses.

Note: Some strata properties allow the surplus funds in the maintenance account to be transferred to the sinking fund with the owners’ approval at the AGM. This helps build the fund for major repairs when the building approaches ten years or more. However, the practice should not be followed if the maintenance account does not have a sufficient buffer. If you are unsure about this practice, it is recommended that you check with the relevant authorities, as the SMA does not explicitly state that such transfers are allowed.

If there is a surplus year after year, owners can request a return of the surplus or a reduction in maintenance charges if they are high.

(5) Reply from authorities on sinking fund expenses

A query was made to the authorities, and they confirmed the following:

(1) Sinking fund expenses cannot be charged into the maintenance account.

(2) Section 50(3)(m) does not mean that the maintenance account can be used for sinking fund expenses.

(3) The following items are sinking fund expenses.

     (a)Purchase of marble polishing machine

     (b)Installation of CCTVS inside service lifts

     (c)Replacement of flooring for playground

     (d)Installation of EV charger

     (e)Replacement of the main sheave for lift 

(4) Replacement of lift cables is a sinking fund expense vide Section 51(2)(c)

Section 51(2)(c): the renewal or replacement of any fixtures or fittings comprised in any common property and any movable property vested in the management corporation.

The following items are maintenance expenses.

      (a)Replacement of new plants

      (b)Replacement of DVR for all CCTV

      (c)Wall repairing works at rooftop

      (d)Hand sanitiser gel and dispenser

      (e)Rectification works for spiral waste bin

      (f)Airconditioning servicing and cleaning

(6) Statutory provisions for maintenance and sinking fund accounts

(A) Maintenance Account

The maintenance account needs to be carefully planned and budgeted. This can reflect the current year’s actual expenditure (the correct maintenance items) plus a buffer for contingencies. The calculation of monthly maintenance charges is based on the budget, and the budget is based on what goes into the maintenance expenditure. A budget is healthy if there is a surplus of 5% of the budget.

SMA section 50 (3): The maintenance account shall be used solely for the purpose of meeting the actual or expected general and regular expenditure necessary in respect of the following matters.

(a)maintaining the common property in good condition on a day-to-day basis

(b)paying for the expenses incurred in providing cleaning services for common property, security and amenities for the occupiers;

(c) paying any premiums for the insurance including those approved by a special resolution in a general meeting;

(d) complying with any notice or order by local authority for periodical inspection of any building;

(e) minor painting on the premises of the common property;

(f) carrying out inspection of all electrical wiring systems of the common property, and replacing or repairing any faulty wiring system;

(g) carrying out inspection, maintenance and repair of the main water tanks;

(h) paying rent and rates;

(i) paying any fee incurred for the auditing of the accounts required to be maintained by the management corporation;

(j) paying all charges reasonably incurred for the administration of the accounts required to be maintained by the management corporation;

(k) paying the remuneration or fees for the managing agent;

(l) paying for the allowances and other expenses of the members of the management committee;

(m) paying any expenses, costs or expenditures in relation to the procurement of services, including the engagement of consultants, legal fees or costs and other fees and costs.

(n) meeting other expenses of a general or regular nature relating to the maintenance and management of the building or land intended for subdivision into parcels and the common property.

The keywords here are general and regular expenditure.

(B) Sinking fund account

Section 51 (2): The sinking fund account shall be used solely to meet the actual or expected capital expenditure in respect of the following matters:

(a)The painting or repainting of any part of the common property, which is a building or other structure;

(b)The acquisition of any movable property for use in relation to the common property;

(c)The renewal or replacement of any fixtures or fittings comprised in any common property and any movable property vested in the management corporation;

(d)The upgrading and refurbishment of the common property; and

(e)Any other capital expenditure as the management corporation deems necessary.

The keyword here is capital expenditure.

(7) Capital expenditure in financial terms

To better understand capital expenditures, it is recommended that you refer to their financial definition and seek clarification from authorities if necessary.

Capital expenditures are funds a company uses for purchasing, improving or maintaining long-term assets to increase efficiency or capacity. Long-term assets are usually physical, fixed and non-consumable assets, such as property, equipment, or infrastructure, with a useful life of more than one accounting period. (Source: corporate finance institute.com)

Also known as CapEx or capital expenses, capital expenditures include new equipment, machinery, land, plant, buildings or warehouses, furniture and fixtures, business vehicles, software, or intangible assets such as a patent or license. (Source: corporatefinanceinstitute.com)

(8) Depreciation

Capital expenditures have an initial increase in an organization’s asset accounts. However, once capital assets are put in service, depreciation begins, and they decrease in value throughout their useful lives. (Source: corporartefinanceinstitute.com)

In accounting, capitalization refers to expensing the costs of attaining an asset over the life of an asset rather than the period the expense was incurred. Rather than listing the asset as an expense, it is added to the company’s balance sheet and depreciated over its useful life. (Source: bankrate.com)

The SMA does not specify which items to depreciate or if the JMC/MC can determine the depreciation amounts. Please consult authorities and your auditor.

Note: Please note that in the audited accounts of my strata development, sinking fund expenses such as painting/repainting, replacement of lift wire cables, replacement of tennis court flooring or upgrading works on the common areas are not subject to depreciation. I suggest checking with your auditor to determine which items should be depreciated.

(9) Examples of maintenance and sinking fund expenses

The compilation of this table is based on feedback from industry professionals and relevant authorities. If you have any doubts about the classification of expenses provided, it is recommended that you confirm with the relevant authorities. If you read this article on a mobile device, please swipe to see comments.

Items	Maintenance Fund	Sinking Fund	Comments
1. Marble polishing machine		SF
2. Maintenance & repair of polishing machine	MF		Includes costs of polishing powder
3. Minor painting of ceiling, doors, walls	MF	SF (Repainting as per definition in Act)	Not stated in the Act or articles what amount is considered major
4. Small repairs on tennis court flooring	MF		Patchwork repairs
5. Replace tennis court flooring		SF	Includes upgrade/refurbishment
6. Replace faulty lights	MF
7. Replace light system to LED		SF	Includes upgrade
8. Replace few cracked tiles	MF
9. Replace major part or whole flooring		SF	Budget 2022: item 6 of the table and floor tile portion could be SF, depending on the amount.
10. Air conditioning  replacement of parts	MF		Example: compressor

11. Gym equipment repair	MF
12. Purchase new gym equipments		SF (physical asset)	Replacement is also under SF
13. Monthly rental of popbox	MF
14. Replacement of lift sheave if not covered under contract		SF
15. Installation of CCTVs inside lifts		SF
16. Replacement of flooring for playground		SF
17. Installation of EV charger		SF
18. Replacement of new plants	MF
19. Replacement of DVR for all CCTVs	MF
20. Wall repair works at rooftop	MF
21. Hand sanitizer gel and dispenser	MF
22. Rectification works for spiral waste bin system	MF
23. Airconditioning servicing and cleaning	MF
24. Water leakage repairs	MF
25. Downpipe repairs	MF
26.Downpipe replacement	MF (minor)	SF (major)	If replacement is major such as from basement to rooftop. If for a few levels only, it can be MF

27. Badminton hall floor repairs	MF		Patchwork replacements/a few wooden boards
28. Badminton hall floor replacement		SF	Replace a major part or a whole floor
29. Golf simulator		SF	New simulator
30. Sensors for golf simulator	MF
31. Annual fees for a licence for golf simulator	MF
32. Replacement of simulator software		SF	Cost could be Rm20k to Rm40k
33. Water pumps	MF (repairs)	SF (new pumps)	Replacement of new pumps would be SF.
34. Office equipments, computers, printers, tables and chairs	MF (repairs)	SF(Physical assets)	Replacement is also under SF.
35. Parcel racks	MF (repairs)	SF	Replacement is also under SF.
36. Bicycles, walkie-talkies for guards			Normally provided for under contract
37. Odd tools for repairs	MF
38. Scaffolding		SF	This is a physical asset which can be depreciated.
39. Repairs of wall crack	MF(minor repairs)	SF (refurbishment)	Major repairs of all the cracks and painting, SF
40. Redo whole waterproofing/major leaks	MF(minor repairs)	SF	Covered by developer’s warranty period.

(10) Principles into practice

Expenses should be charged to the appropriate account, either maintenance or sinking fund. It’s not a good practice to charge all sinking fund expenses to the maintenance account and then wait for the next committee to reverse the charges during auditing. It’s best to avoid incorrect charges for both accounts and treat them promptly before the Annual General Meeting. Do it right from the start so that the financial operations can function correctly.