The tax office has shut the door on a loophole churches have been using to fund their building projects. It will no longer be possible to gain tax deductibility for donations for a building, by setting up a “school building fund” unless you are building something with “the character of a school building”.

In the past some churches have funded church buildings using tax-deductible school or college building funds, arguing the premises were being used for education. It will be much harder to do this under a new ruling from the ATO, which is even tougher than a draft ruling it has been using recently.

Mark Fowler of Neumann & Turnour Lawyers in Queensland summarises the new requirements: “The Ruling focuses on the extent and character of the use, and outlines the following factors as being relevant for the determination of whether a building is ‘used as a school’:

“(a)    the amount of time the building is put to school use relative to the amount of time it is put to non-school use;

“(b)   the number of people involved in the school use of the building relative to the number involved in its non-school use;

“(c)    the physical area of the building put to school use relative to the physical area put to non-school use; and

“(d)   the extent to which the building has been adapted or modified in order to accommodate its school or non-school use.

“The Ruling provides that ‘a building will not be regarded as a school building where its non-school use is of such kind, frequency or relative magnitude as to preclude the conclusion that the building has the character of a school building.’”

Who controls a building is key to whether donations to a building fund will be tax deductible. “A particularly important factor in determining whether a building is a ‘school building’, and therefore eligible to receive deductible gifts, is the person or body which controls use of the facility” says Fowler. “Paragraph 41 provides:

‘Where a qualifying body carries on a school organisation and also acts in one or more other capacities (for example as a church), it is necessary to have regard to the extent to which the school organisation will be able to control the use of the building. It may be inferred that a building being acquired or constructed is not a school building where a person, organisation or institution outside of the school organisation will be able to determine how the building is used.’”

The tax office’s interest in church use of tax-deductible school building funds is reflected in the rulings’ use of worked examples. Most of the examples concern churches. For example – setting up a formal “School of Ministries with a formal curriculum, lecturers and assessment will qualify for tax deductible fund if it requires a building, but an adult Bible Education program without an external qualification or exams may not.

An auditorium used by a school, but made large enough to hold church meetings for more people than the school has students, will not be able to use tax deductible funds.

However the lobby group Christian Schools Australia believes schools will not be significantly affected by the new ruling.