Decision Impact Statement in relation to school building funds

The ATO has released its Decision Impact Statement regarding the Federal Court decision of The Buddhist Society of Western Australia Inc v Commissioner of Taxation (No 2) [2021] FCA 1363. The Decision Impact Statement responds to the Court’s decision that the definition of the word ‘school’ for the purpose of school building funds is a broad one, to be determined only by its ordinary meaning and not by additional requirements expressed by the Commissioner of Taxation.

Entities operating a fund for the acquisition, construction or maintenance of educational institutions may now find it easier to establish their entitlement to endorsement by the ATO as a deductible gift recipient (DGR). A DGR can receive tax deductible gifts and contributions, which donors can deduct from their assessable income when lodging their tax returns.

The case

The Buddhist Society of Western Australia was endorsed as a DGR under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for the operation of a school building fund. Under the ITAA 1997, the fund was to be used for the acquisition, construction or maintenance of a building used as a school or college.

The Commissioner of Taxation revoked the endorsement on the basis that the relevant buildings were not being used as a school or college. The Commissioner arrived at this decision by considering whether the buildings were being used as a ‘school’ within the ordinary meaning of the word, as well as additional factors set out in the ATO’s Taxation Ruling 2013/2 (TR 2013/2).

The Commissioner relied on the following factors set out in TR 2013/2 as being indicative of a school:

• a set curriculum
• instruction or training provided by suitably qualified persons
• the enrolment of students
• some form of assessment and correction
• the creation of a qualification or status that is recognised outside of the organisation.

The Buddhist Society sought judicial review of the decision and the Federal Court held that the Commissioner had made an error of law in applying the factors in TR 2013/2 as being additional requirements for the definition of a ‘school’.

The Court confirmed that the only test for whether an institution is a ‘school’ is whether it falls within the ordinary meaning of the word, holding that that the factors listed in TR 2013/2 do not form part that ordinary meaning.

While the Commissioner may have regard to the TR 2013/2 factors, they should not have been treated as forming part of the test themselves.

The Court also held that the overall purpose of a building is an important consideration in determining whether a building is a school.

The decision was remitted to the Commissioner to be remade according to law by applying the proper meaning of the word ‘school’.

ATO response

The Commissioner accepted that the factors expressed in TR 2013/2 do not form part of the ordinary meaning of ‘school’ and that the ordinary meaning does not require a course of education to be vocational as opposed to recreational. The Commissioner will instead focus on the activities carried out and whether 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 consider the overall purpose for which the building was established and maintained, as well as the activities, including non-school activities, that support that purpose.

TR 2013/2 will also be reviewed and updated to reflect the Federal Court’s decision in relation to determining whether a building is used, or to be used, for a school.

The Commissioner has stated that they will follow this approach in relation to future applications, as well as previous applications that have been refused.

What does this mean?

This case provides an example of the ATO imposing additional criteria beyond the ordinary meaning of a term and the Court disagreeing with the ATO’s approach. In light of the broader approach to determining whether a building is used, or to be used, for a school, not-for-profit organisations may find it easier to establish school building funds and secure their entitlement to endorsement as a DGR.

Additionally, organisations operating a school building fund that have previously applied for and been unsuccessful in obtaining endorsement as a DGR may apply to the ATO to be reconsidered in accordance with the broader approach.

Please contact Carly Ashwood if you have any questions about the Decision Impact Statement or any of the matters contained in this article.