Charlie – in the first instance, your Owners Corporation (O/C) should have approved of a method to repay those monies incorrectly expended from its Sinking Fund within 3 months of the first such payment – refer Sect 71(3) of the NSW Strata Schemes Management Act.
Whilst I can’t comprehend how your O/C or its Strata Manager could allow an Owner to fall so far behind in their Levies, now that those arrears have been paid, the funds have to be allocated in accordance with the relevant components of the contributions as originally invoiced; that is as your Strata Manager has advised.
Once those allocations have been made, if there’s still a deficit in the Sinking Fund relative to the past administrative fund expenses paid from it and the arrears to that fund as now received, then Sect 71 (3) applies, and if there’s a surplus then your O/C could resolve to leave it there as a “safety net”, or to scale-back future contributions to that fund accordingly, or resolve unanimously to transfer it the administrative fund.