Land tax rules for charities are missing the mark

Land tax rules in Victoria are providing a disincentive to good management of property by charities. And it seems that some charities may be slugged with land tax for trying to be good stewards of their real estate.

Charities are under a legal obligation to ensure their property is applied for charitable purposes. They are also under a governance (and moral) obligation to use their assets to maximum benefit for the charity.

But Victorian law is currently proving a barrier for charities who want to take opportunities to maximise the benefit of any spare capacity or ‘downtime’ of their properties that trying to generate revenue from property from leasing, co-working and ‘external hire’ arrangements could result in a land tax assessment.

The problem in the law

The Land Tax Act 2005 (Vic) gives land tax exemptions for certain property or property uses.  For general charitable use, the Act allows property in Victoria to be exempt from land tax if it is “used by a charitable institution exclusively for charitable purposes” (our emphasis). 

Not “primarily” for charitable purposes, or “mostly” for charitable purposes – the words of the legislation recite a test of exclusivity.

The problem with this “all or nothing” approach is that it discourages use of spare capacity.  No-one is levying income tax on charities when they invest spare money into the stock market.  So why does the State of Victoria levy land tax on charities who redirect spare capacity of their properties into revenue-generating use to fund the organisation’s charitable activities?

The problem illustrated – the school theatre

Let’s say a school has a fantastic performing arts theatre. It cost a lot to build, so the business manager has the good sense to make it available for hire.

If the theatre is hired by another school for an event, there is no problem. The theatre is still being used for an educational purpose and the land tax exemption can still apply. Education is a charitable purpose.

When a local dance group wants to hold their annual concert in the theatre, it appears to be another good opportunity to earn some revenue from the facility’s spare capacity. The problem is that the local dance group is not a “charitable” activity and is not a charity itself.

The mere act of hiring out the facility for a non-charitable use has the potential of exposing the school to an assessment for land tax. A one-off hiring event might be long regretted if it were to result in a land tax assessment for a charity trying to do the right thing and put its spare capacity to good use.

A ‘commercial’ hire doesn’t even have to be one that makes money. If it is not a ‘charitable use’, then a literal reading of the current law puts the land tax exemption at risk.

The problem is everywhere

The requirement of exclusive charitable use does not embrace the reality that modern charities are creative and entrepreneurial in generating revenue. They should not be discouraged from doing so – it helps our donation dollars go further.

It is largely a nonsense to think that charities want to use their properties for “exclusive charitable use”. A literal reading of the legislation will exclude taking advantage of things like:

  • Renting out a spare office;
  • Hiring out the church hall for functions;
  • Renting car parking space to a neighbour;
  • Allowing sports coaching groups or fitness classes to hire the sports field; and
  • Private functions at campsites.

These are things that should be encouraged, not penalised.  It would be undesirable to see charities “locking up” their facilities or limiting their use for fear of getting a land tax assessment.  That just causes communities to miss out and makes charities look selfish.

Potential solutions

We don’t necessarily advocate for land tax exemption just because a property is owned by a charity (although that is the situation in NSW).  But we do believe in allowing room for charities to spread their entrepreneurial wings without being shot down by the tax man.

Here are alternatives that we think would work:

  1. Apply a “primarily or substantially” test
    If a property were used primarily or substantially for charitable purposes, the exemption would still apply.This test is applied to properties which are exempted from land tax as non-profit sporting or outdoor recreational facilities.If they are allowed to use a small amount of spare capacity for commercial hire arrangements, why can’t other charities?
  2. Pro-rata exemption
    Charities could have their exemption reduced (rather than removed) to the extent of the days of non-charitable use.This could be on a self-assessed basis and subject to audits for compliance.This would be an improvement on the current “all or nothing” position and would allow charities to manage the tax cost of commercial hiring.

What can you do for now?

Until our parliamentary representatives see fit to address this issue, there are some things you can do:

  • Find out whether you’re paying land tax, whether you’re exempt and why. Maybe you should be paying land tax. Maybe you shouldn’t. Maybe you should be exempt from land tax, but for a different reason.
  • Consider ways to preserve your exemption and still do commercial hire. This can come down to documenting the purpose of your hiring arrangements and creating some policies or guidelines around who you hire to and why.

And when the board asks you to look at ways to earn revenue from the spare capacity in your real estate assets and building facilities, send them a copy of this article.

How we can help

For further assistance, please do not hesitate to contact us.