On 4 October 2024, the Australian Taxation Office (ATO) published an updated consolidated version of Taxation Ruling TR 2013/2 (TR 2013/2) regarding school building funds (SBFs).

It contains long awaited amendments to the ATO’s guidance on SBFs that are intended to bring it in line with the decision of the Federal Court of Australia in The Buddhist Society of Western Australia Inc v Commissioner of Taxation (No 2) [2021] FCA 1363 (Buddhist Society case).

There are two key seismic changes brought about by the Buddhist Society case:

1. The first is a broader definition of what a school is.
2. The second is a purposive test for whether a building is used as a school building.

What is a “school”?

The first key change to TR 2013/2 is how the ATO defines what a school is. In the Buddhist Society case, the Federal Court found that the ordinary meaning of “school” should be adopted when interpreting the provision relevant to SBFs in the Income Tax Assessment Act 1997 (Cth)[1].

The ATO has given the following guidance about how it will interpret the “ordinary meaning” of a “school”:

• A broad concept: a school is ‘a place where people, whether young, adolescent or adult, assemble for the purpose of being instructed in some area of knowledge or of activity’;[2]
• No formal exams: to be a school, the education provided ‘does not require formal examination or testing, or the granting of formal awards of certificates of completion’;[3]
• Looser requirements on the instruction provided: the concept of ‘regular, ongoing and systematic instruction in a course of non-recreational education’ has been removed;[4] and
• Factors that can strengthen a finding: certain factors like a set curriculum, enrolment of students, some form of assessment, qualified teachers will help demonstrate that there is a school.[5]

What is a “school building”?

The second key change is the removal of a requirement that a building be substantially used as a school. Instead, the overall purpose of the building and the importance of the activities carried out in it are relevant.

To elaborate:

• No more “substantial use” requirement: the requirement that a building must be substantially used as a school has been removed, but the language of ‘substantial use’ is retained in Example 11[6] and in ‘Appendix – Explanation’[7];[8]
• Overall purpose: in place of the “substantial use” requirement, in determining whether a building is a school building you must have regard “to the overall purpose of the building and the importance of each of the activities carried out to that purpose”;[9]
• Incidental buildings: the ATO will consider the connection of any non-school use to the school use in the context of evaluating the overall purpose of a building;[10]

TR 2013/2 also has new examples. It has removed an example which characterised a Sunday school as not a school.[11]

Implications for existing SBFs

On the whole, this broader concept of school will be good news for most existing SBFs.

The “overall purpose” test is a less onerous one than the “substantial use” test.

We recommend that organisations which operate existing SBFs review its activities to ensure it fits within the ATO’s revised guidance on:

• What it understands the ordinary meaning of a “school” to mean;[12] and
• What factors constitute a school building.[13]

Implications for organisations wishing to establish an SBF

1. The broader definition of a “school” makes it easier to demonstrate eligibility as a SBF.
2. If you operate a school, you may wish to consider whether you may now be eligible to operate a DGR endorsed SBF.
3. If you previously had a SBF application rejected by the ATO on any of the grounds that have been subsequently revised, it might be worth reconsidering whether you may be eligible for endorsement as a SBF.

Please contact Tina Lee if you have any queries in respect of the revised TR 2013/2 or require any advice on the matters raised in this article.

[1] Item 2.1.10 of the table in subsection 30-25(1).
[2] Expanded paragraph 12 of TR 2013/2.
[3] New paragraph 12A of TR 2013/2.
[4] Previous paragraphs 17 to 19 of the old TR 2013/2 have been removed.
[5] New paragraph 12B of TR 2013/2 (reflects previous paragraph 18).
[6] Paragraphs 104-104H of TR 2013/2.
[7] Paragraphs 173 to 181 of TR 2013/2, noting that the Appendix is not legally binding.
[8] Previous paragraphs 31 to 35 of the old TR 2013/2 have been removed.
[9] Amended paragraph 38 of TR 2013/2.
[10] Expanded paragraph 43 of TR 2013/2.
[11] Previous paragraphs 94 to 113A; Example 4.
[12] Paragraph 12 of TR 2013/2
[13] Paragraphs 30 and 30A of TR 2013/2.