Ruling Compendium TR 2013/2EC







This edited version of the Compendium of Comments is not intended to be relied upon. It provides no protection from primary tax, penalties, interest or sanctions for non-compliance with the law. | This is a compendium of responses to the issues raised by external parties to draft Taxation Ruling TR 2011/D5 - Income tax: school or college building funds. | This compendium of comments has been edited to maintain the anonymity of entities that commented on the draft ruling. | ATO Response/Action taken [2] | Schools seeking to rely on the draft need certainty. The ruling must provide a clear and straightforward means of users ensuring compliance with the legislation. | The Ruling gives particular attention to the requirement that a fund be established and maintained solely to provide money for the requisite purpose (see paragraphs 57-62), as well as to the meaning of the terms and expressions 'school', 'building', 'used as a school' and 'used... by a qualifying body'. | The Ruling is intended to provide clear principles for qualifying bodies and funds. However, it remains necessary to apply those principles to the facts of each case. | The approach in the Ruling recognises that it is not possible to devise a single test which can be applied to ensure compliance in all cases. Accordingly, the Ruling does not adopt the 'more than 50% use' rule which was included in Taxation Ruling TR 96/8 (withdrawn). | Examples illustrate the practical application of the principles in the Ruling, including their application where school buildings are put to non-school use. | The fact that some taxpayers may have applied the more than 50% rule in unintended ways is an integrity issue and should be dealt with by the ATO taking action against the organisations who have wrongly applied it. | The unintended application of the 50% rule was an indication that the rule did not produce a legally correct outcome in all cases. In these circumstances, it was necessary to amend the rule in order to ensure that it accurately reflected the law. | The submissions present the following options for the date of effect: | The ATO has considered all of the comments received on this issue and recognises that funds donors and funds may have relied on TR 96/8 (withdrawn) in planning existing arrangements. These considerations are reflected in the date of effect arrangements in paragraphs 114 to 119 of the Ruling. | Effectively, the former '50% use rule' continues to apply to acquisition or construction arrangements committed to before the issue of the Ruling, provided that a fund meets the requirements of the Ruling for any arrangement entered into after that date. | Funds are also permitted to apply the 50% use rule in relation to maintenance costs until 1 July 2013. | Meaning of 'established and maintained solely' - the sole purpose test | The draft Ruling does not give separate consideration to the issue of whether a fund can have a sole purpose if there are multiple uses of a building but effectively confines itself to the issue of what qualifies as the use of a building as a school. | Paragraphs 63 to 73 of the Ruling, in particular, deal with the factors which are taken into account in determining whether a fund is established and maintained for the requisite purpose. In this regard, it is critical to determine how a fund actually uses money and consider the inferences which may be drawn from that use. | The Ruling also requires funds to have regard to how buildings are actually being used; see paragraph 26. The actual use of a building is relevant to both its character as a building 'used as a school' and to an inquiry about the fund's purposes. TR 96/8 (withdrawn) and TR 2011/D5 also required funds to have regard to the use of buildings. | The draft Ruling obliges funds to look more specifically at the use to which individual buildings are put rather than to the general intent of the fund, and is likely to require schools to undertake an audit of their buildings. It is a much narrower approach than that in the original ruling. | The Ruling recognises that it is necessary to have regard to both the purposes of the fund and the character of the building. See the response to Issue No 3.1. | The purpose of the fund is confused with the use of the building. | There has been significant investment into the academic and vocational education sectors by charities such as churches over a long period of time. The ATO proposal fails to recognise that in many instances these entities are paying more than 50% of the facility development costs from non DGR funds. | The Ruling recognises that it is critical to determine how a fund actually uses money and consider the inferences which may be drawn from that use. | There has been a move from focussing on whether a school used a building, to now focussing primarily on whether there are any activities held in a building that can disqualify it from being characterised as being used as a school. | See paragraphs 12, 13 and 106. | Paragraph 152 of the Ruling discusses covered outdoor learning areas (COLA) structures. COLAs as described in the Ruling are considered to be buildings for the purposes of Item 2.1.10. | Paragraph 13 should make it clearer that you cannot have a school building fund for part of a building when the remainder of that building is not a school (whether the other part is pre-existing or built at the same time as the school). | The Ruling takes the view that a part of a building can be a building in the circumstances set out in paragraph 23. This view is considered to have regard to the context in which the term 'building' appears. | Paragraph 13 should clarify how schools can demonstrate the delineation between the part of the building used as a school and the part used as something else. | The applicable principles are set out in paragraph 23 and paragraphs 153-155. | Do the elements of a school canteen fit-out (for example, cupboards, benches, serveries, plumbing and electrical installations and built in appliances) qualify as fixtures? | See paragraphs 14-15 and 107-111. | An item is a fixture to a building where it is attached to a building so as to form part of the building permanently, or for an indefinite or substantial period of time. See paragraphs 158 to 161. | The question of whether a given item is a fixture is a matter to be determined in accordance with property law. A detailed consideration of what may constitute a fixture in particular cases is beyond the scope of the Ruling. | What is a school or college ? | In spite of the fact that the High Court determined the ordinary meaning of 'school' in Cromer Golf Club v. Downs, the ATO continues to run the unsuccessful arguments it put in C of T v. The Leeuwin Sailing Foundation, and seeks to support its position by reference to an English case from 1973 and two old Board of Review cases where the word school was used in a different context. A provision that exists for the purpose of encouraging, rewarding or protecting some class of activity should not be narrowly construed. | Barwick CJ's judgment in Cromer explicitly refers to 'trade schools' as well as 'technical schools'. | See paragraphs 16-18, 34, 114-139 | Like TR 2011/D5, the Ruling applies the decisions in Commissioner of Taxation v. The Leeuwin Sail Training Foundation Limited ( 1996) 68 FCR 197; 96 ATC 4721; (1996) 33 ATR 241 and Australian Airlines Ltd v. Commissioner of Taxation ( 1996) 71 FCR 446; 96 ATC 5187; (1996) 34 ATR 310. | Both decisions support the conclusion that a school is ordinarily an institution and that the factors outlined in paragraph 18 are relevant to determining whether such an institution has the character of a school. | Examples 1 to 5 have been provided to clarify what is considered to be a school for the purposes of Item 2.1.10. | The ruling should make it clear that the functions and activities of a Sunday school must be controlled by a qualifying body, and that a religious institution is not necessarily a qualifying body as it may not be a 'society or association'. | The elements of the definition of institution in paragraph 114 (establishment organisation and association) could themselves be explained in the ruling. | The Ruling contains a revised interpretation of the meaning of 'school or college' for the purposes of Item 2.1.10. | The question of whether a particular activity constitutes a school is determined by reference to its true character rather than the label attributed to it. Accordingly, in determining whether an activity labelled a 'Sunday School' is a school for the purposes of Item 2.1.10 the Ruling requires regard to be had to the factors in paragraphs 13 to 19. | The Ruling recognises that a qualifying body must carry on the school, control the use of a building and use it to provide instruction of the required kind; see paragraph 49. | Examples 3 and 4 are included to illustrate where a Sunday school would or would not be considered to be a school for the purposes of Item 2.1.10. | See paragraphs 17 and 136. | Whether a school is being carried on for the purposes of item 2.1.10 is a question of fact. The Ruling provides criteria but does not specify what constitutional or legal arrangements might constitute a school. These arrangements can take a variety of forms. See paragraphs 11-19. | The Ruling does not require an organisation to be separately incorporated or to hold a separate Australian Business Number before it can be regarded as an institution or a school organisation. | As suggested for paragraph 129, modify the manual skills comment in the opera, ballet and drama dot point as well. | These suggested changes are reflected in paragraph 145. | What is a building used or to be used as a school or college ? | Removal of the 'more than 50%' rule means the approach has changed from one where it must be demonstrated that the primary and principal use of a building is a school to one where use other than as a school or an integral part of a school must be merely minor or occasional. This allows for a much narrower range of acceptable circumstances. | The Ruling considers a range of factors which are relevant to determining whether a building has the character of a building 'used as a school'. | The Ruling contains examples which are intended to illustrate the application of these factors to particular cases. | External use of school facilities is part of the public policy landscape in which schools have been encouraged to operate by both state and federal governments (for example the BER program). The draft flies in the face of this clear public policy direction by suggesting that minor or occasional other use must not 'materially affect the cost of acquiring, constructing or maintaining the building'. | Some buildings are highly sought after for out of hours hire due to the nature or capacity of the building and this may not occur only 'from time to time'. | Further examples have been provided to clarify the view in the Ruling. Example 8 specifically addresses other use under the BER program. | See also the Response to Issue No. 6.1. | This comment raises policy considerations which are beyond the scope of the ATO's role as an administrator of the taxation law. | Paragraph 156 should be rewritten. Neither the judgment in Cobb's case nor the language of Item 2.1.10 warrants the limitation on minor or occasional other use to use that does not materially limit the use of the building as a school or the cost of the building. These are issues which arise in considering whether the fund has multiple purposes. | The Ruling recognises that it is necessary to have regard to both the purposes of the fund and the character of the building. See the response to Issue 3.1. | The Ruling requires funds to have regard to how buildings are actually being used; see paragraph 26. The actual use of a building is relevant to both its character as a building 'used as a school' and to an inquiry about the fund's purposes. | The ATO's views on the implications of Cobb & Co Ltd v. Commissioner of Taxation (1959) 101 CLR 333; (1959) 12 ATD 11; 7 AITR 534 in this context are set out in paragraphs 176, 177, 224, 225 and 226 of the Ruling. | Delete the second sentence in paragraph 22. The ordinary meaning of the words in item 2.1.10 does not require the relevant element to be a structurally integrated part of a building the rest of which is used as a school. | This sentence does not appear in the Ruling. | A safe harbour test based on a quantifiable calculation of time is easier to administer and provides greater certainty than notions of what is minor or occasional. | The Ruling does not include a 'safe harbour' test. See the responses to Issue No 1.1 and Issue No. 1.2. | Where buildings are used for multiple purposes, a determining factor seems to be who takes priority in the event of a timing clash between different users. However, circumstances may dictate a different outcome at different times - for example a school may have priority access to its chapel during school hours, while the church group may have priority access outside of school hours. The draft does not allow for this. See paragraphs 23-29 and 148-149. | The Ruling considers the relevance and weight to be given to control of a building in determining whether it is a building used as a school and whether it is used by a qualifying body as a school. | See paragraphs 35, 41, 49-52, 181, 188-189 and 202-206. | It is far more cost effective to incorporate additional equipment at the construction phase than to retrofit later when actually needed by the school. In the intervening period the availability of such equipment may make the building more attractive to external users with the resulting income benefitting the school. Efforts to offset its costs are in the public interest. | A provision of money may give rise to an inference that a fund was not established or is not being maintained for the requisite purpose where it is disproportionate to the needs of the school; see paragraph 71 of the Ruling. However, this inquiry takes into account both the present and future needs of the school in question. | Item 2.1.11 is similar to 2.1.10, but is made subject to the special conditions in section 30-35. Section 30-35 requires that the building must be 'used, or going to be used , principally as residential accommodation...'. | The Ruling contains a revised interpretation of Item 2.1.10. It does not rely on the concept of 'minor or occasional other use'. | This encourages the misuse of community facilities and charitable assets by requiring the assets not to be used to their full capacity. | The better approach is to consider whether the building is in fact being used as a school with no reference to the time that the building is used. | See responses to Issue No. 6.2 and Issue No. 6.3 in relation to the use of a building and the responses to Issue No 3 in relation to the sole purpose test. | The time a building is used for school purposes is one factor which is relevant to determining whether a building can be characterised as a school building. However, a range of other factors are potentially relevant. | Example 8 confirms that a school building can be put to regular non-school use by the community and still be regarded as a school building. | In considering whether a fund was established and is being maintained for the requisite purpose, it is relevant to have regard to the fund's constitutional documents; see paragraph 64. | However, it is also necessary to have regard to the fund's actual activities and the use of the building. | This may require a school to set up separate funds for two parts of a building which has multiple uses, with costs pro-rated and appropriate allocations from each fund. This could be unnecessarily complex. | See paragraphs 257 to 269. | The Ruling should include a definition of the term 'multipurpose complex' | See paragraph 255 and 256. | However, inferences may be drawn about the purposes of a fund from the way in which the fund provides money. See paragraphs 65 to 73 | The Ruling has revised its interpretation of Item 2.1.10 to make it clear that it applies consistently. | Qualifying body, use of a building by a qualifying body | Paragraph 19 should make it clear that a particular fund is not restricted to a particular location but can be for a group of schools. For example a system of schools operated by a religious body under one central administration may have schools at several locations. | The Ruling recognises that two or more buildings may be used as a school in conjunction with one another. Further, there is nothing in the Ruling which requires all buildings to be in the same location. | Paragraphs 33-35 and 168-173 assume, but do not require, use by a single body. The ATO has previously accepted that use by more than one qualifying body could be counted in determining whether the relevant building was used as a school. This practice should continue, and should be confirmed in adjustments to paragraphs 35 and 173. | The Ruling does not consider whether, or the circumstances in which, a single school building fund may provide money for the acquisition, construction and maintenance of buildings used by more than one school or qualifying body. This issue is currently the subject of further consideration by the ATO. See the response to Issue No. 7.1. | Paragraph 34 makes no reference to other forms of incorporation such as a company limited by guarantee or trusts which are common structures housing schools. | No change. A description of the various legal forms which a government, public authority, society or association may adopt in order to conduct a school would be outside the intended scope of the Ruling. | The view that a building must be controlled by the educational institution goes beyond the terminology of item 2.1.10. Item 2.1.10 simply requires the building to be used as a school by a qualifying body. Control by the educational institution is an irrelevant consideration. | The Ruling requires a qualifying body to control the use of the building and to use it to carry on a school. See paragraph 49. | This reflects the terminology in Item 2.1.10. In particular, it recognises the distinction between using a building 'as a school' and using a building 'for the purposes of' a school. | Acquisition or construction | See paragraphs 56 - 59 and 206-208. | A qualifying body is not considered to have acquired a building for the purposes of Item 2.1.10 where it has a mere license to occupy or use the building. In such a case, the thing acquired by the qualifying body is a right to access or use a building for certain purposes. Such a body may use the building for the purposes of a school, but it does not use the building 'as a school'. | Taxation Ruling TR 2002/14 discusses the distinction between a lease and a licence to occupy. It explains that a lease confers on a tenant an interest in the land and the right to exclude persons from the property whereas a licence does not. | In order for a qualifying body to use a building as a school the body must: | The control required would arise where the qualifying body has a legal or equitable interest in the building. | See paragraphs 49-52 and 55. | Having regard to the ordinary meaning of the words in item 2.1.10, and as recognised in the first sentence in paragraph 206, fair rent paid even just for some hours or days per week should be a permitted disbursement, irrespective of whether the building can only be used as a school permanently or for the whole of its useful life. | The fact that a building may occasionally be used for school purposes does not mean that the building is a school building. See paragraph 26. | A qualifying body does not use a building as a school merely because a third party provides access to the building for purposes which are beneficial to the operation of a school conducted by the body. | See paragraphs of the 52 and 206. | Furthermore, a qualifying body will only use a building as a school where it controls the use of the building and uses the building to provide instruction of the kind contemplated in the Ruling. See paragraph 49. | Accordingly, the term of a lease is a factor which is relevant to determining whether there is a school and whether a building is used as a school by a qualifying body. | However, a test based only on a minimum lease term would not allow for a full and proper consideration of all of the relevant circumstances. | See further, paragraph 212. | At the end of paragraph 203 add '(which could point to the fund having another purpose)'. | See paragraphs 70, 79 and 80. | The Ruling includes a consideration of when a fund may provide money to meet expenses incurred due to conditions on the construction of a building. | See paragraphs 81 and 294-297. | The Ruling is a public ruling applying to a class of entity. As such, it is designed to provide high level principles which are capable of being applied to a wide range of circumstances. | The ATO will give consideration to whether further guidance is required to address the scenarios referred to in this submission, or whether these scenarios are more appropriately dealt with on a case by case basis, having regard to the general principles in the Ruling. | Can an apportionment be revised if the local authority eventually requires the building to be on a different part of the parcel, or to be of different dimensions, or a different configuration? | Can the fund be used to purchase land for future expansion where there are no definite plans at present? | Given the Macquarie Dictionary definitions of 'maintenance' and 'maintain', security expenditure directed at keeping a building intact or preserving it in its present condition is just as much expenditure on maintenance within the ordinary meaning of the term as a roof repair which is designed to prevent water leaking into a building. | See paragraphs 51-52 and 196-197. | See also, paragraphs 306 to 308. | Apportionment of costs may be an issue as cabling of computer systems used for administration and in classrooms often extends to lighting, fire systems, perimeter gates and CCTV. | The cost of perimeter fencing should be specifically addressed. | Security monitoring costs that relate only to a school building are considered to relate to the maintenance of the building for the purposes of Item 2.1.10. | Perimeter fencing does not need to be specially addressed as it is neither a building nor a fixture to a building for the purposes of Item 2.1.10. | See paragraphs 53-55 and 192-202. | The Ruling recognises that a school building fund can disburse money on fund administration costs which enable or facilitate the provision of money to acquire, construct or maintain a building used as a school. See paragraph 89. | See also, paragraphs 90 and 319-320. | Investment by a school building fund | It would be helpful if this could be addressed in the ruling. | See paragraphs 60 and 209-210. | Example 20 has been included to illustrate when a fund may lend money to a school on an investment basis. | At times, investments will not fall within what is ordinarily understood by the term 'temporary': | The types of acceptable investments could be described as being at arm's length and consistent with a trustee's duties under trust law. Reference could be made to TR 95/27 paragraph 43. | Whether something is temporary will depend on the circumstances. Limiting the scope of the term by reference to specific timeframes would not invite a full and proper consideration of relevant circumstances. | See paragraphs 86-88 and 314-318. | Example 19 confirms that an investment can satisfy the sole purpose test even though planning approval may take a number of years. | As part of an expansion program to cater for increasing enrolments, City College wishes to build either a new classroom block or to enlarge existing school buildings. Inquiries at the local Council reveal that, either to ensure compliance with the latest version of its parking code or in response to local resident or other community concerns, the council is unlikely to grant Development Approval for the new works unless City College provides for additional off-street parking for at least 50 cars. There is objective evidence to support the likely attitude of the Council. Based on advice from its architects and town planners, City College decides that this likely requirement would best be met by erecting a new stand alone garage building to accommodate 50 cars. It includes that car parking building in the application for Development Approval, and receives approval which imposes a condition that the car park building be erected. | The car park building forms an integral part of the operation of the school and as such is a building used as a school for the purposes of item 2.1.10. | It is not different from a toilet block or stand alone dormitory block, both of which cater to the needs of students and relevant staff, with the toilet block also catering to the needs of visitors. | The provision of extra parking spaces is not optional. | Religious College, a denominational school, plans to build a chapel on school grounds. The College is only a day school. Instead of the chapel lying idle outside school hours, the College plans to make it available to people of the same religious denomination in the area (or to an agency of the relevant Church body) for the conduct of evening and weekend religious services. That use would be more than minor or occasional. The arrangement would involve some (but not material) extra construction costs, and some extra ongoing maintenance costs (principally cleaning). | Whether Item 2.1.10 is satisfied will depend on the purposes for which money is provided and a characterisation of the building. | See also Examples 13, 14 and 15. | The premise seems to be that making a facility open to the public means it is not integral to the operation of the school. However, is this the right outcome if a school offers a VET course in hospitality and as part of the course it operates a restaurant which provides meals to the general public outside school hours? | Examples 13 and 14 are intended to address the characterisation of buildings which can potentially be regarded as school buildings when considered in conjunction with other buildings. | Other parts of the Ruling should be referred to in order to characterise buildings which can or have the potential to be characterised as school buildings on the basis that they are used for the purposes of instruction. | If the fund did not have to cover the extra costs, then the chapel could still be built. | If use of the building by community groups did not entail extra costs, then the building should be available for such use. | If there were extra costs, but they were immaterial, or material but not covered by the fund, the satisfaction of the sole purpose test should not be affected. | If there were material extra costs, and the fund proposed covering them, that may lead to the inference that the fund did not meet the sole purpose test in item 2.1.10. | Examples 12, 15 and 16 address the principles which the proposed example seeks to illustrate. | As in Example 5, except that instead of XYZ School constructing a separate facility, it wishes to knock down the old (and run down or outmoded) school tuckshop and erect a new facility which is capable both of serving as a school tuck shop during school hours and of being made available to the local community to operate at times and on days when the school does not operate, for the benefit of people participating in or otherwise attending sporting activities at the adjacent sporting fields, courts and other facilities. That other use would not be minor or occasional. Constructing, equipping and maintaining (principally cleaning) the new facility may involve material extra expense. | Whether Item 2.1.10 is satisfied will depend on the use of the building, the purpose of providing money and the characterisation of the building. | The size of an auditorium should not determine the outcome. The building footprint would not vary significantly as regardless of size the determinants of building codes require similar egress etcetera with tiered seating, breakout rooms and student cafes and resource libraries. | Also, Example 12 should be updated as follows - Delete the last sentence in the first paragraph and add the following after the second sentence: | The College bona fide considers it desirable to have a large auditorium for school events. The College is in an area that does not have a suitable venue for such events. | Based on information such as current and projected student enrolments and records regarding the number of attendees that typically attend college functions, the College believes that the auditorium should seat at least 2,500 people. | To obtain maximum use from the building, it is intended to be multi-purpose. Its design will allow it to be divided into smaller spaces for other uses as a school when it is not required as a single auditorium for school use. | The related church body would like to use the auditorium for church services on Sundays, but would need it to seat 3,000 people and may also need additional lighting and staging equipment. It would also like the auditorium complex to include administration offices solely for church use and a gift shop. None of these uses would prevent the auditorium from being used as a school or interfere with or intrude upon the school program. | In these circumstances, an issue arises as to whether the other uses and the other surrounding circumstances lead to the objective conclusion that the fund was not established or is not being maintained for the requisite sole purpose. | If it was contemplated that , or permissible for, the whole of the acquisition construction and maintenance costs of the new auditorium complex to be paid out of the fund, that inference should readily be drawn. | However, if there is an expert and reasonable apportionment of the costs to isolate the extra, and the fund is not permitted to contribute towards any of that extra cost, the requisite sole purpose could still exist. | The facts in Example 12 have been revised, taking into account this comment. | It is considered, however, that a school building fund cannot provide any money to acquire, construct or maintain the building described. It is considered that the physical attributes of the building prevent it from be regarded as a building 'used as a school' as a matter of ordinary language. | An ACNC type of entity is defined in section 995-1 of the ITAA 1997 to mean: | ...an entity that meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012. | This amendment commences when the ACNC Act commences (expected to be December 2012).