Land leased by charitable institutions to third parties may be exempt from land tax

In brief - Supreme Court of Victoria finds that land owned by the University of Melbourne that was leased to a provider of a student accommodation facility was exempt from land tax in The University of Melbourne v Commissioner of State Revenue [2021] VSC 156

The student accommodation facility was developed by a third party provider under a Project Deed and other agreements with the University. Under those agreements, the University contributed the land and the provider designed, constructed and operated the facility for an agreed term. At the end of the term the provider was required to transfer the ownership of the facility to the University.

The agreements allowed the University to participate in the development of the student accommodation facility and to monitor compliance by the provider. The agreements required the preparation of a detailed design and the provision of certain services to residents. They also specified how accommodation would be allocated and required residents' fees to be approved by the University each year.

The lease was for a term of 38 years for a rent of $1 per annum. The permitted use of the land was the provision of student accommodation and the provision of accommodation for other persons in accordance with the Project Deed.

The University's objectives were to procure purpose-built student accommodation facilities that it could control and that would provide students with a holistic experience at an affordable price level.

Was exemption from land tax limited to active use of the land? Did "exclusively" govern use of the land or purposes of the charitable institution?

The exemption from land tax required the land to be used by a charitable institution exclusively for charitable purposes. The parties accepted that the University was a charitable institution, the provider was not a charitable institution and the provision of student accommodation by a university was a charitable purpose. The dispute concerned whether the exemption was limited to active use of the land and whether the word exclusively governed the use of the land or the purposes of the charitable institution.

Justice Osborne found that the exemption applied. He did not think it was necessary for the University to occupy the land to use it, in other words, active use of the land was not required. Also, the word exclusively did not require the use of the land to be by the University alone, it was sufficient if the use was exclusively for the University's purposes. He relied on the text, context and legislative history of the exemption and the decision of the High Court in Ryde Municipal Council v Macquarie University (1978) 138 CLR 633, which considered a similar exemption in rating legislation.

University did not enter into agreements with provider to generate a rental return, but to advance its charitable objectives 

It was significant that the University had entered into the Project Deed and other agreements because it was able to have ongoing involvement in the provision of student accommodation on the land. This distinguished the arrangements from a standard commercial lease entered into by a charitable institution for the sole purpose of generating a rental return. Land subject to such a lease would not be eligible for the exemption.

It was also relevant that the University had provided student accommodation since 1870 and the agreements with the provider had been entered into to meet the expected demand for student accommodation.

Part of the land was sub-let by the provider to the operator of a café. Justice Osborne found that the café was an incidental or ancillary use to the main charitable purpose of providing student accommodation because it was established to enhance the living experience of the residents.

What the outcome of this case may mean for charitable institutions regarding land tax exemptions 

This case makes it clear that land leased by a charitable institution to a third party to advance the charitable purposes of the charitable institution may be exempt from land tax in Victoria. On the other hand, land leased by a charitable institution to a third party to generate a rental return where the use of the land had no connection with the charitable institution's purposes would not be exempt from land tax in Victoria.

While this case concerned the Victorian land tax legislation, there are many land tax, stamp duty and rating statutes in Australia that contain a similar exemption for charitable institutions. This case therefore may also be relevant in considering the application of those exemptions.