Edited version of your private ruling

Authorisation Number: 1012465856253

Ruling

Subject: Educational allowance

Question

Is the educational allowance paid by your current employer assessable income in the year of receipt?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commenced on

1 July 2012

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, including

· copy of stipend agreement and

· offer of casual employment.

You are a full-time student at a university.

You are enrolled in a four year course.

You are being supplied with a monthly educational allowance by your current employer.

The educational allowance was granted upon and as a condition of your acceptance to the university.

The allowance is paid primarily for educational purposes.

Your current employment is on a voluntary basis with casual work hours. You work approximately 10 hours a week.

You are paid an hourly rate for your employment.

Your studies and employment commenced at a similar time.

Your employer has the right to your work as it pertains to the synthesis of your thesis, that is once your thesis is published, they will have access to it and any data set as it is then considered a public document.

The receipt of the educational allowance does not guarantee you of further employment with your current employer.

Before working with your employer in city A, you were employed by this employer in another country.

A condition of your acceptance contract with the university was that you have the financial capacity to complete your course of study. You approached your employer for funding and they agreed to pay you a stipend during your studies.

Your employer has stated that the payments are not subject to your entering into or continuing an employment or work contract arrangement with them.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 51-10.

Reasons for decision

Exempt income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year. However, if an amount is exempt income, it is not included in your assessable income (section 6-15 of the ITAA 1997).

Section 11-15 of the ITAA 1997 list certain types of exempt income. Included in this list is section 51-10 of the ITAA 1997 which deals with income derived by full-time students.

Item 2.1A of the table in section 51-10 of the ITAA 1997 provides that, subject to the exceptions and special conditions contained within section 51-35 of the ITAA 1997, 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.

Paragraph 51-35(c) of the ITAA 1997 provides that an amount is not exempt if the payment you receive is made on the condition that you will (or will if required) become, or continue to be, an employee of the payer.

Paragraph 51-35(d) of the ITAA 1997 provides that a payment by a person or an authority on the condition that the student will (or will if required) enter into, or continue to be a party to, a contract with the person or authority that is wholly or principally for the labour of the student is also not exempt.

That is, payments are not exempt from income tax if they are made on the condition that the student will be an employee of, or work for, the payer.

In FC of T v Ranson 89 ATC 5322, the Federal Court took the view that the words "upon condition" do not require that there be a contract between the parties or any other form of legal relationship. The court held that the exemption does not apply where, as a matter of ordinary language, it can be said that the receipt of the scholarship amount is conditional on the recipient working with the payer if the payer so requires.

The operation of the words "on condition", were also considered by the Full Federal Court in Polla-Mounter v FC of T 96 ATC 5249.

The Full Federal Court held that, in determining whether an amount received under a scholarship scheme is exempt, it is necessary to determine only whether the relevant condition was imposed as part of the initial arrangements for the scholarship, and so the question must be considered at the time of the granting of the scholarship, not at the time the payments are made. The relevant condition may take one of three forms:

(1) the student "will" render services, that is, at the time of the imposition of the condition, the student is not in fact rendering those services but will be required to commence rendering them immediately or at some appointed future time

(2) the student "will if required" render services, that is, the condition demands that the services will be provided at a time in the future if the person or authority so requires, and

(3) the student "will continue to" render services, that is, at the time of the imposition of the condition, the student is in fact already rendering services and the condition is that he or she will not cease to provide those services.

Other cases in which payments were found not to be exempt include FC of T v Hall 75 ATC 4156, Case R31, 84 ATC 295 and Case H36, 76 ATC 308.

In Case E3, 73 ATC 9, a "full-time bursary" paid to a bank officer to undertake a honours degree course while on leave with full pay was not exempt income. The payments in question could not be correctly described as a ``scholarship'' or ``bursary'' for the purposes of the exemption. They were received by taxpayer in his capacity of employee rather than student.

Payments to the following taxpayers were likewise received in the taxpayer's capacity as employee rather than as a student and were not exempt:

· an officer of the Attorney-General's department paid by his employer while attending a legal skills course (Case J58, 77 ATC 499)

· a company executive granted two years paid leave at 50% of his normal salary to complete a university course. The taxpayer was not required to recommence with the company and the company was not obliged to re-employ him at the conclusion of the period of study leave (Case N28, 81 ATC 154), and

· a Health Commission nurse granted study leave to undertake a course at a College of Advanced Education. The terms and conditions of her study leave included payment of a reduced salary and college fees. The Commission considered her to be an employee whose duty was to attend the course in substitution for her normal duties, but she was not bound to continue employment with the Commission on completion of the course (Case U92, 87 ATC 527).

As stated in Income Tax Ruling IT 2581, the exemption will not extend, to payments, whether termed "scholarships" or otherwise, which are in effect payments in the nature of remuneration for present or future services. Allowances paid to research workers, for example, are indistinguishable in nature from salaries and will continue to be subject to tax.

It is questionable if you would have received the educational allowance had you not been an employee of entity A. The educational allowance was not offered to other outside non-employee people and the fact that you were an employee and requested your employer for funding during the period of your study leads to the conclusion that the payments were made because of an employer-employee relationship rather than being solely a student.

Although, you are not bonded to continue service with your employer, it remains that the allowance is paid by your employer. In your case, the educational allowance is not exempt from income tax because you are providing employment services to your employer.

Ordinary income

Ordinary income has generally been held to include three categories, namely, income form rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned,

· are expected,

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

That is ordinary income includes amounts received periodically or regularly and which the recipient relies on for the maintenance of themselves and/or their dependants (FCT v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82).  

It is considered that the educational allowance paid by your employer to assist with your expenses whilst you are studying is ordinary income, as it was paid on a regular basis and you were able to depend upon it for your expenditure.

Your educational allowance therefore forms part of your assessable income and should be declared on your annual tax return.

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