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Edited version of private ruling
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Ruling
Subject: Assessability of scholarship income
Question and answer:
Is the income received from a bonded scholarship paid by local government assessable?
Answer: Yes.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commenced on:
1 July 2009
Relevant facts and circumstances
You are a full-time student with part-time employment.
You are receiving a scholarship in which you are paid an amount each year for three years whilst you complete your degree.
You are paid by a group of local government authorities.
You have been advised that you are unable to deduct any of your self-education expenses by a pre-issue review of your 2009-10 income tax return.
The scholarship agreement explains that several local governments in a remote area of Australia have agreed to provide a scholarship to undertake the post-graduate degree offered at a university.
The objective of the scholarship program is to secure the services of suitably qualified, Australian trained professionals in the area where there have been difficulties in the past in recruiting and retaining qualified people.
Students understand and acknowledge that in return for the scholarship funding they will be required to undertake a period of service in the community associated with the sponsor on the terms and conditions set out in the agreement.
Students receive payment of the scholarship fund by advanced instalments with two payments in the first year and four equal instalments in the second and third years.
If students default as outlined in the terms and conditions of the agreement, they shall repay the sponsor the total of the scholarship fund paid together with an additional percentage of the funds paid within a stipulated number of days of defaulting. In addition, if the student fails to pay within that time, interest will be charged on the outstanding amount.
When you commence service you will be working locally and paid by the relevant Government authority.
The scholarship agreement states that the sponsor will provide an income guarantee in that it will ensure that your income is equal to the base salary of an equivalent senior officer employed by the Government. In addition, if the Sponsor requires you to work on a part time basis and remain on call in the region after hours, the Sponsor will provide you with the full income guarantee.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-20
Income Tax Assessment Act 1997 Section 11-15
Income Tax Assessment Act 1997 Section 51-10
Income Tax Assessment Act 1997 Section 51-35
Reasons for decision
Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.
Subsection 6-5(1) says that assessable income includes ordinary income and defines ordinary income as income according to ordinary concepts. The legislation does not provide any specific guidance on what is meant by income according to ordinary concepts however, the courts have identified a number of factors which indicate whether an amount has the character of income according to ordinary concepts. These include:
· it is earned;
· it is received regularly or periodically;
· it is expected; and
· it is relied upon.
It is not necessary for all of these characteristics to be present for a receipt to be considered ordinary income.
Subsection 6-5(2) advises that the assessable income of an Australian resident taxpayer includes ordinary income directly or indirectly from all sources, whether in or out of Australia, during the income year.
In your case, your scholarship is received periodically, by advanced instalments. You would also expect it and you rely upon it to assist meeting the costs of study. Therefore, your scholarship is ordinary income for the purpose of subsection 6-5(2).
Exempt income
Subsection 6-15(2) explains that if an amount is exempt income it is not assessable income.
Subsection 6-20(1) tells us that an amount of ordinary income is exempt if it is made so by a provision of the ITAA 1997, and refers to the summary list of provisions about exempt income contained in section 11-15.
Section 11-15 lists those provisions dealing with income derived by certain entities which may be exempt. Included in this list is section 51-10 which deals with income earned by a full time student in the form of a scholarship, bursary, other educational allowance, or educational assistance.
Item 2.1A of the table in section 51-10 advises that, subject to the exceptions and special conditions contained within section 51-35, income received by way of a scholarship, bursary, educational allowance or education assistance by a full time student at a school, college or university is exempt from income tax.
For the scholarship to be exempt from income tax:
· the taxpayer must be a full time student at a school, college or university;
· the taxpayer must be in receipt of a scholarship and the scholarship must be provided principally for educational purposes; and
· there must be no condition that the taxpayer be an employee of the scholarship provider or enter into any contract with the scholarship provider that is wholly or principally for labour.
Application to your circumstances
In your case, you are a full time student in receipt of a scholarship. The scholarship is provided principally for educational purposes and it is a condition that in return for the scholarship funding provided by the Sponsor, you will be required to undertake a period of service in the community associated with the Sponsor on the terms and conditions set out in the agreement.
Although you may not be directly employed by the Sponsor of your scholarship after completing your degree, Item 5 of the schedule of the agreement provides you with a minimum income guarantee. This guarantee ensures that your income will be equal to the base salary of an equivalent professional employed by the Government, in the event that the amount of work you carry out falls below that which would provide the equivalent income.
Based on these facts, your scholarship is not exempt from income tax under section 51-10.
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