William & Mark – here’s how I’d approach your very similar and unavoidably “messy” situations:
1) Irrespective of how the spalling occurred, and not withstanding the excellent description of the magnesite inter-reaction in post #5, the costs of repairs to all common property and for all associated works such as the removal of Owners’ fixtures and fittings and floor coverings is the responsibility of the Owners Corporation unless it has determined otherwise under the provisions of Sect 62(3) of the NSW Strata Schemes Management Act (1996) – where quite frankly I doubt that Cl.3(b) could be substantiated.
2) Individual Owners would be required to meet the costs of repairs to all areas that are part of their Lots (e.g. internal walls), and to re-install or renew their fixtures, fittings, and floor coverings.
3) The Owners Corporation (O/C) should meet the costs of a professional assessment to determine a cumulative present value for each Owner’s fixtures, fittings, and floor coverings that need to be removed in order for it to have repairs made to its common property, and pay that amount to those Owners as a contribution to the costs of re-installation or replacement of those items by them.
There are some additional factors including whether or not individual Owner’s floor coverings (e.g. carpets & tiles) are those originally installed when the building was completed, in which case replacement is the O/C’s responsibility, and whether the O/C should meet the costs of reinstalling existing fixtures and fittings where that’s possible and of new underlay (to replace the magnesite), but these and some others that I haven’t discussed are all unnecessary complications in my opinion that would definitely impede a sensible outcome.
Again in my opinion, IF possible it would be time and cost-effective for the O/C’s contractors to quote for and undertake all components of the works (e.g. repairs and re-installations / renewals), and to split their invoices between it and the individual Owners.
Finally, have your respective O/Cs considered borrowing the funds in circumstances where the Sinking Fund is deficient, and Mark, did you obtain a building inspection of your (then) potential purchase prior to the auction?