Edited version of private ruling

Authorisation Number: 1011837789006

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Ruling

Subject: Income Tax - withholding tax - pay as you go withholding - scholarships

Question 1

Is a school, university or college (SU or C) obliged to withhold any amount of pay as you go withholding (PAYG) from a scholarship payment that is exempt income of the recipient (full-time student) under Item 2.1A of the table in section 51-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No

Question 2

Is a SU or C obliged to withhold any amount of PAYG from the scholarship payment that is not exempt income of the recipient (part-time student) under Item 2.1A of the table in section 51-10 of the ITAA 1997 even though it the payment is otherwise identical in all respects to question 1?

Answer: No

Question 3

If the answer to question 2 is yes, which legislative instrument requires this withholding?

Answer: Not Applicable

This ruling applies for the following periods:

1 January 2012 to 31 December 2016

Income Tax - withholding tax - pay as you go withholding - scholarships

A SU or C offers a range of scholarships designed to help fund the costs of tertiary education. The scholarships offer financial assistance to high achieving students, as well as to those students who are most in need.

The SU or C has a current policy of only providing educational scholarships to students who are enrolled in full time courses.

The SU or C is seriously considering providing scholarship payments to students of part-time courses which cannot be income tax exempt under Item 2.1A of the table in section 51-10 of the ITAA 1997 (which requires the student be full-time).

The scholarship would involve a selection process that is either competitive or needs based. The scholarship is awarded based upon merit or some other rational criteria.

The purpose of the scholarships would be to assist in meeting the costs of tertiary education. The payments are being made by way of a scholarship, bursary, educational allowance or educational assistance and are provided principally for educational purposes.

The funds for the scholarship are paid by the SU or C and not by the government.

The scholarship payment would in no way relate to the potential recipient student being required to provide any services to the SU or C or to any other party.

The scholarship payments do not fall within any of the provisions of the TAA requiring withholding.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 51-10

Income Tax Assessment Act 1997 section 51-35

Taxation Administration Act 1953 Sch 1 Division 12

Reasons for decision

Question 1

Summary

The SU or C is not obliged to withhold an amount as PAYG from the scholarship payments which are exempt payments in the hands of the recipients by virtue of them attending university on a full time basis.

Detailed reasoning

Subsection 12-1(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) contains a general exemption from withholding if the payment is exempt income of the entity receiving the payment. The initial step is therefore to determine whether the scholarship payments are exempt income in the hands of a scholarship recipient.

Will the scholarship payments be exempt income of the scholarship recipient?

Subsection 6-5(1) of the ITAA 1997 provides that an amount is included as assessable income if it is income according to ordinary concepts. Payments made under a scholarship program are generally treated as ordinary income and are therefore assessable.

Division 51 of the ITAA 1997 records amounts of ordinary or statutory income which is exempt and in some cases the exemption is subject to exceptions or special conditions or both. Under section 51-10 Item 2.1A, payments received for a scholarship, bursary, educational allowance of educational assistance are exempt payments for full time students at a school, college or university subject to the limitations contained in section 51-35 of the ITAA 1997.

In general terms, for a scholarship to be exempt from income tax:

· the taxpayer must be in receipt of a scholarship and the scholarship must be provided principally for educational purposes;

· the taxpayer must be a full-time student at a school, college or university; 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.

Are the payments made by way of a scholarship, bursary, educational allowance or educational assistance?

Paragraphs 34 to 45 of Taxation Ruling TR 93/39 discuss the meaning of the words 'scholarship, bursary, educational allowance or educational assistance' for the purposes of the former subsection 23(z) of the Income Tax Assessment Act 1936 (ITAA 1936). Paragraph 35 of TR 93/39 states that the words are no more 'than a description of rewards for merit attained as a result of competition or selection on the basis of general criteria'.

As stated in the application the applicant is aware of the difference between a full time and part-time student because they are an educational institution providing the funds for the scholarships as well as the education for which the scholarship is paid.

Division 12 of Schedule 1 to the TAA provides that under the PAYG system an entity must withhold amounts from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity), company directors, office holders, religious practitioners and others.

The scholarship recipients do not meet the definition of any of the specified payees in terms of Division 12 to the TAA therefore withholding would not be a requirement under those provisions.

Subsection 12-1(1) of Schedule 1 to the TAA however, also provides that an entity need not withhold an amount under section 12-35 from a payment if the whole of the payment is exempt income of the recipient.

As the recipients of the scholarships whom are full time students will be exempt from income tax under section 51-10 Item 2.1A of the ITAA 1997 amounts would not under any circumstances be required to be withheld under the PAYG system from those earnings.

Question 2

Summary

Although scholarship payments made to part-time students are not exempt income of the recipients in terms of section 51-10 of the ITAA 1997 they do not fall within any provisions which require the implementation of PAYG withholding with respect to those payments.

Detailed reasoning

For a scholarship payment to be exempt income the student must be a full time student receiving education at a school, college or university as indicated in section 51-10 Item 2.1A of the ITAA 1997. The exemption is not available to part-time students. The scholarship payments received by part-time students are income according to ordinary concepts and form part of their assessable income in accordance with subsection 6-5(1) of the ITAA 1997.

Division 12 of Schedule 1 to the TAA provides that under the PAYG system an entity must withhold amounts from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity), company directors, office holders, religious practitioners and others.

In some particular cases there are regulations which cover the withholding of PAYG tax from a certain defined class of people and this is the case with performing artists who have been specifically included in the withholding system under section 12-35 or subsection 12-60(2) to the TAA.

Recipients of scholarships do not fall within the definition of any of those nominated under Division 12 of Schedule 1 to the TAA therefore there is no requirement for the application of PAYG withholding to the payments made.

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