‘Used and Occupied’: How the University of Melbourne Changed Tax Law for Charities

• Charities are generally exempt from land tax in Victoria, when they are in active ‘use’ of the land for their charitable purposes.
• A recent Supreme Court decision involving the University of Melbourne (which is a registered charity) found that the word ‘use’ extends to merely renting out land.
• The Parliament of Victoria reacted with legislation that now requires charities to both use and occupy land in order to receive a land tax exemption.
• This can have a significant impact on charities which are currently leasing properties such as church halls to generate income without paying land tax.

Charities enjoy a number of tax benefits and concessions in Australia. Perhaps the most well-known of these is the tax exemption which exists at the federal level, where charities are exempt from Commonwealth income tax.

An exemption is also available at the state-level on land tax in Victoria. Land tax is a tax paid to the State Revenue Office in proportion to the value of the Victorian real property owned by a person, company or trust. 

Some land is exempt from land tax. The most common instance of exemption is for a primary place of residence. This means that owner-occupiers do not pay land tax on their home in Victoria.

Another exemption is available for charities. Prior to 2022, section 74 of the Land Tax Act 2005 (Vic) (the ‘Act’) set out that land which was ‘used’ by a charitable institution exclusively for charitable purposes, as determined by the Commissioner for State Revenue, was exempt from land tax. In practice, this meant that charities which owned and used land for their charitable purposes did not pay land tax on that property. In addition, any person or company who leased land to a charity was exempt from paying tax on that land, since it was ‘used’ by a charitable organisation. This meant that charities could often obtain more favourable rental rates..

Early 2021 saw the University of Melbourne seek to expand its student accommodation facilities. The University, an incorporated charity, proposed a scheme by which they would lease the land, and the successful tenderer would build, own, and operate the facility.  After the agreed period, the building would be transferred to the University. 

The case of University of Melbourne v Commissioner of State Revenue [2021] VSC 156is an appeal by the University against a notice by the Commissioner that the land is not exempt from land tax in whole or in part. In its decision, the Court considered the interpretation of the word ‘used’ in s 74 of the Land Tax Act. The University successfully argued that ‘used’ is a ‘word of wide import extending to the grant of a lease’, as opposed to it being ‘limited to an active physical use of the land by the lessee’. As a result, the Court concluded that the meaning of ‘use’ was to be extended in order to be synonymous with ‘occupy’, and therefore may refer to some form of use other than actual occupancy. 

Further, the Court considered whether the word ‘exclusively’ in section 74 of the Act governs the use of the land, or whether it relates to the purposes of the charitable institution. The Court found in favour of the University of Melbourne, holding that ‘exclusively’ does not mandate that the use must be by the University alone and may instead be for the University’s purposes. This ruling means that a charity like the University of Melbourne could lease its real property to generate income whilst that land remained exempt from land tax.

Shortly after the Court’s decision, the Parliament of Victoria responded by amending the Act to make the land tax exemption available only to charitable organisations which use and occupy the land. This means that the land tax exemption is no longer available to charities who merely lease land. Rather, to claim the full exemption from land tax, they must also be in occupation of that land, and use it in its entirety for exclusively charitable purposes.

The consequence of this amendment for charities could be significant. In general, it removes a charity’s ability to lease land to a non-charitable rganization without paying land tax. However, should the lessee also be a charitable rganization which occupies the land for exclusively charitable purposes, the land tax exemption would be preserved. 

Practically this means that the common practice of church spaces or other buildings being leased by charities will no longer be available without tax consequences for the lessor unless the lessee is also a charity. This can impact a charity’s ability to earn money to fund its activities. 

As a consequence, it is very important to seek legal advice before a charity leases space. If you would like to learn more, please contact Warlows Legal for a free consultation.