New TR 2011/D5 – School or College Building Funds

Draft Taxation Ruling 2011/D5 (released on 5 December 2011, and available at http://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR2011D5/NAT/ATO/00001) significantly changes the ATO’s previous interpretation regarding School Building Funds, and particularly for multi-purpose buildings used by schools and churches.  Whereas the ATO’s previous view is that multi-purpose buildings simply needed to satisfy the “more than 50%” rule, the draft Ruling now proposes a “sole use” test.  Many existing and future multi-purpose buildings will not qualify for expenditure of Building Fund monies under the new draft Ruling.

The new “sole use” test

A School Building Fund must be established and maintained solely for providing money for the acquisition, construction or maintenance of a building used as a school or college.

The concept of “building” has not changed.  However the ATO’s view is that the building must now solely be used as a School or College (with the exception of minor or occasional use).  The Building must:

• be used for regular and systematic instruction by the School or College; or
• form an integral part of the operation of the School or College and is used for School or College purposes (i.e. toilets, administration buildings, canteens, chapels for religious schools, before or after school care etc).

Where the Building is used by other groups (i.e. Multi-Purpose Buildings), the other use must only be minor or occasional.  This means that the alternative use must not:

• materially limit or affect the use of the building as a school;
• materially affect the cost of acquisition, construction or maintenance of the Building;
• be a material use of the Fund.

The ATO considers the following alternative uses would be acceptable:

• Allowing a community group to use classrooms out of school hours, provided the use does not affect the building’s characterisation as a School or College building (i.e. there are no material changes to the building to accommodate its alternative use);
• Use of a School Chapel for weddings or religious services, provided the use does not limit its use as a School or College building and it does not materially affect the cost of acquiring or constructing the building or the cost of maintaining the building.

Importantly, the ATO considers use of a building by a church, whereby the building is materially altered to accommodate the church (i.e. through the installation of dedicated seating, sound systems etc), would not be acceptable.  The ATO also indicate that the use should not materially increase the cost of maintaining the building.[1]

Application of the draft Ruling

The new draft ruling is available for comment until 2 March 2012. Presumably a final ruling will issue shortly after this date.

Until the final Ruling is issued, the 50% rule continues to apply and money can continue to be collected by Building Funds and dispersed on 50% use buildings.  However when the final Ruling is issued, the 50% rule will cease to apply.  Money can only be dispersed on buildings that comply with the “minor or occasional use” rule.  The donor of monies that are dispersed on buildings that do not comply with the new rule will not be entitled to claim a deduction, and the trustees of the Fund will be exposed to liability.

Submissions to the ATO

We recommend that schools consider making submissions to the ATO regarding the impact of this draft Ruling on their operations.  Submissions can be made until 2 March 2012.

The draft Ruling also contemplates that a unique settlement arrangement could be entered into between existing funds and the ATO, essentially grandfathering existing Funds under the old ‘more than 50% use’ rule to allow for the expenditure of funds raised under those existing rules (and perhaps an additional transitional period to take into account additional liabilities that entities are exposed to as a result of these changes, i.e. unable to pay loan repayments etc).  Schools might also want to consider pursuing such an agreement with the ATO for their existing multi-purpose buildings.

If you require assistance with either submission, please contact us.

 

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