School Building Fund as Deductible Gift Recipient under the Income Tax Law – Analysis of BSWA decision

School Building Funds

School Building Fund(SBF) is a special category which has been provided with the special benefit under the Income Tax Laws in Australia that SBF is eligible for endorsement as a Deductible Gift Recipient (DGR). A gift or contribution to a school building fund is deductible under section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997) if certain conditions are met. The donors to these Funds will be happy if they can claim the donation as an expense against income when they lodge Income Tax Returns. However, ATO’s view on the interpretation of the ‘school’ was strict and hence it was not easy for some entities that run schools including ‘religious school’ or ‘Sunday school’ to get endorsed under this category. A recent decision by the Federal Court of Australia has interpreted the meaning of ‘school’ in a wider but practical sense which can lead to a range of possibilities.

?

Legal background

Subdivision 30-BA of the Income Tax Assessment Act 1997 (ITAA 1997) deals with various types of the DGR that can be legally endorsed. Item 2.1.10 of the table in subsection 30-25(1) apply to persons who make a gift or contribution to a public fund which purports to be a school building fund. In order for a fund to satisfy Item 2.1.10:

?????i.???It must be a public fund established and maintained solely for the purpose of providing money for the acquisition, construction or maintenance of a building

used as a school; the building must be used as a school by a government, a public authority or a non-profit society or association as described in Item 2.1.10; and

?????ii.???The fund must be registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act 2012), or not be an ACNC type of entity as defined in the ITAA 1997.?

The question as to whether an entity can get endorsed as a Deductible Gift Recipient has become a matter of several factors, as per the recent decision in Buddhist Society of Western Australia (Inc) (“BSWA”).

???????????????????????????????????

BSWA decision

BSWA was endorsed as a deductible gift recipient for the operation of the Dhammaloka Buddhist Centre Building Fund (Fund) under Subdivision 30-BA of the Income Tax Assessment Act 1997 (ITAA 1997). On 4 October 2019, the Commissioner revoked the endorsement of BSWA as a deductible gift recipient because the Fund did not satisfy the requirements of table item 2.1.10 of subsection 30-25(1) of the ITAA 1997. In particular, the Commissioner did not consider that the relevant buildings at the Dhammaloka Buddhist Centre were used as a school or college, for the purposes of table item 2.1.10, applying the views expressed in Taxation Ruling TR 2013/2 Income tax: school or college building funds.BSWA objected to the revocation decision and the Commissioner disallowed the objection, prompting BSWA to commence its appeal in the Federal Court .On 4 October 2019, the Commissioner revoked the endorsement of BSWA as a deductible gift recipient because the Fund did not satisfy the requirements of table item 2.1.10 of subsection 30-25(1) of the ITAA 1997. In particular, the Commissioner did not consider that the relevant buildings at the Dhammaloka Buddhist Centre were used as a school or college, for the purposes of table item 2.1.10, applying the views expressed in Taxation Ruling TR 2013/2 Income tax: school or college building funds. BSWA objected to the revocation decision and the Commissioner disallowed the objection, prompting BSWA to commence its appeal in the Federal Court.

The main issue before the Federal Court was whether the objection decision was attended by an error of law as to the ordinary meaning of 'school'. In the objection decision, the Commissioner concluded that the Dhammaloka Buddhist Centre was not a building used as a school because:

??????????i.????it was not a 'school' within the ordinary usage of that word, as it was not a place with the primary function of providing regular, ongoing and systematic instruction in a course of non-recreational education, and

??????????ii.??any school use was not substantial - other uses of the building precluded the conclusion that it had the character of a school building.

?BSWA agreed that the relevant authorities for the purpose of construing the ordinary meaning of 'school' are Cromer Golf Club Ltd v Downs (1973) 47 ALJR 219 (Cromer), Commissioner of Taxation of the Commonwealth of Australia v The Leeuwin Sail Training Foundation Ltd [1996] FCA 626 and The Commissioner of Taxation of the Commonwealth of Australia v Australian Airlines Ltd [1996] FCA 935. BSWA contested the Commissioner's interpretation of these authorities and whether various parts of TR 2013/2, which imposed additional conditions, were consistent with the ordinary meaning of school expressed in the authorities. McKerracher J found that the Commissioner had proceeded on a misunderstanding of the law as to the 'ordinary meaning' of 'school' and accordingly made an error of law in the objection decision. His Honour also??noted that while ‘regular, ongoing and systematic instruction' may be provided by a school, the presence of these factors is not essential to satisfy the ordinary meaning of school. Furthermore, the absence of regular, ongoing and systematic instruction does not confirm that an entity is not operating as a school. His Honour stated that the factors expressed in paragraph 18 of TR 2013/2 do not form part of the ordinary meaning of 'school'. While it was appropriate for the Commissioner to have regard to those factors in applying the ordinary meaning test, they should not be taken to form part of the test themselves. While they may indicate the existence of a school, they do not form part of a test to deny that a school exists. His Honour further observed that the ordinary meaning of school does not require the course of education to be vocational as opposed to recreational. Consideration of whether a course of instruction is recreational or vocational misdirects attention to the intention and subjective state of mind of the student, rather than the instruction given at the purported school in an activity or area of knowledge. In considering whether a building is 'used, or to be used as a school', his Honour found that it is necessary to consider the overall purpose (or purposes) for which the building is established and maintained. The importance of each of the activities carried out in the building as they relate to the purpose of the building as a school must be considered. It is also important to consider any connection that non-school activities conducted in the building may have to school activities, and the extent to which both pursuits support the purpose of the building as a school. The Commissioner was therefore wrong to simply compare the total number of hours of operation the building was put to school and non-school use and then ascribe a percentage value to school activities.

?

Decision Impact Statement ?

The Commissioner issued a Decision Impact Statement (TR 2013/2) which is legally binding up on the Commissioner, clarifying the doubts of many organisations who are already endorsed or looking forward to getting endorsed their School Building Fund. The key requirements for a School Building Fund according to this Ruling are

????i.?????????there must be a school;

????ii.????????there must be a building;

????iii.???????the building must be used as a school;

????iv.???????the building must be used as a school by a qualifying body;

??? ?v.????????there must be acquisition, construction or maintenance; and

????vi.????????the fund must be established and maintained for the requisite purpose.

?`Few examples are given in the Ruling clearly showing whether a Fund would be eligible for the endorsement as a DGR or not. One of the examples is given below:

Sunday School that is a school for the purposes of Item 2.1.10

Good Neighbour Church conducts a number of Sunday school groups for children of various ages. The Church establishes a Sunday school committee of three persons which includes the pastor and two other permanent members from the congregation. The Church makes provision in its constitution for the establishment of this committee and specific rules are developed in respect of the operation of the committee and the Sunday schools. Separate accounts and records are kept.

The Committee is responsible for selecting prospective teachers based on minimum standards that they have set. Teachers are required to be properly trained and to have appropriate qualifications (including blue card). The Committee is also responsible for the curriculum that is taught and has applied the national curriculum for that religious body. The design of the curriculum takes into account the age of the child and their level of knowledge.

Children are assessed on what they have learnt, for which they receive certificates which enable them to progress to new levels. Parents are also required to register their children and ensure that they are signed in and out of classes.

The Sunday school groups are a school for the purposes of Item 2.1.10.

?

Commissioners view

In summary, the Commissioner agrees with His Honour's views that the ordinary meaning of school does not require a course of education to be 'vocational as opposed to recreational'. Therefore, the focus will be the activities carried out to determine if instruction is being given in an activity or area of knowledge. In determining whether a building is 'used, or to be used as a school', the Commissioner will give consideration to the overall purpose (or purposes) for which the building was 'established and maintained' and the activities which support its purpose. Where the 'activities' include a mixture of school and non-school activities, the Commissioner will have regard to the connection of the activities and the extent to which both activities contribute to the purpose (or purposes) for which the building was 'established and maintained'.