Edited version of your private ruling

Authorisation Number: 1012491095893

Ruling

Subject: Scholarships

Question 1

Will PAYG Withholding tax be required from a scholarship living allowance paid to a student?

Answer

No

Question 2

Will a scholarship living allowance be assessable income of the assisted student?

Answer

Yes

Question 3

Will a scholarship education expense reimbursement and/or the payment of HECS-HELP fees on behalf of an assisted student be a fringe benefit?

Answer

No

This ruling applies for the following periods:

FBT Year Ended 31 March 2014

FBT Year Ended 31 March 2015

FBT Year Ended 31 March 2016

FBT Year Ended 31 March 2017

FBT Year Ended 31 March 2018

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

The scholarship Scheme operates to provide scholarships to students to enable them to pursue their studies.

The student undertakes study in a course at a university, institute, college or other provider of educational services.

The course of study will be the theory base for a position that has been identified as a "highly in demand" position in the organisation.

A scholarship is only offered to a student who has undergone a stringent selection process and has been found to be suitable.

The scholarship agreement covering the student's entitlement and obligations is reduced to writing.

The contract contains the terms and conditions of the scholarship.

Payment of the entitlement is made periodically through the period of the course of study so long as the student continues to achieve the required level of grade.

Following the successful completion of the tertiary course and if the student is deemed to be suitable, the student may be made an offer of employment.

The students will, if offered a position, take up the position offered or may be required to repay all or part of the scholarship.

The student may also be required to complete vacation employment. If this short term employment is offered and taken up, the student will continue to receive a scholarship living allowance for the period of employment.

In accordance with the contract the scholarship is comprised of the following entitlements:

· A living allowance each fortnight;

· A reimbursement of expenses related to the student's studies (i.e. union fees, text books and equipment) up to $X per annum (incidentals allowance);

· Expenses will only be reimbursed after the submission of an Expense Report and copies of receipts, to the organisation in the first month of each semester;

· A payment of the student's HECS-HELP fees will be made directly to the university, institute, college or other provider of educational services on behalf of the assisted student (study allowance);

· The organisation will pay the educational institution the upfront amount of the HECS-HELP payment attributable to the student's studies corresponding with the period for which the assisted student is under the contract;

· The student must supply the tax invoice, "Notice of HECS-HELP Liability" of CAN, issued by the ATO or the institute, to the organisation within a number of business days of receipt for payment.

The student will be bonded to the organisation at the completion of study.

At the conclusion of each semester of the Studies, the student will forward a copy of official academic record or results to the organisation immediately upon receipt of that record or those results from the institute.

The organisation has the right to first option should the student be required to be part of a work learning program (work experience).

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35.

Income Tax Assessment Act 1997 Section 51-10.

Income Tax Assessment Act 1997 Section 51-35.

Income Tax Assessment Act 1997 Subsection 6-1(1)

Reasons for decision

Question 1

Summary

PAYG Withholding tax is not payable on the scholarship payments.

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?

Under section 51-10 of the Income Tax Assessment Act 1997 (ITAA 1997), certain education and training payments are exempt income subject to the limitations contained in section 51-35 of the ITAA 1997. Under subsection 51-35(c), payments are not exempt where a student (i.e. a scholarship recipient) will (or will if required) become, or continue to be, an employee of the entity making the payment.

This scholarship requires a period of bonded service whereby a recipient will, at the discretion of the organisation, become an employee for a period stipulated in the scholarship contract.

Due to the bonded service requirement, the income will not be exempt income in the hands of the recipients under section 51-10 of the ITAA 1997 because section 51-35(c) operates to deny the exemption.

Under section 12-35 of Schedule 1 to the TAA, an entity must withhold from amounts of salary, wages, commission, bonuses or allowances paid to an individual as an employee of that or another entity. There must be an employee relationship in existence and the payment must go to an individual as an employee.

In order to determine whether withholding is required from the scholarship payments under section 12-35 of Schedule 1 to the TAA, it is therefore necessary to determine whether the payments are a salary, wage, commission, bonus or allowance paid to an employee as a consequence of employment.

Is a scholarship recipient an employee?

The term employee is not defined in the TAA. Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

Taxation Ruling TR 2005/16 explains a number of factors that may be applied in determining whether an individual is a common law employee. These include:

(a)   control

(b)   does the worker operate on their own account or in the business of the payer?

(c)   results contracts

(d)   whether the work can be delegated or subcontracted

(e)   risk

(f)     provision of tools and equipment and payment of business expenses

(g)   other indicators

Under the terms of the scholarship, the organisation has:

(a)   the right to receive a recipients academic achievement report at the end of each semester;

(b)   the right to direct a recipient to undertake vacation employment;

(c)   the right of first option where a recipient undertakes a work integrated learning program and

(d)   the right to bond a recipient for certain specified periods at the completion of a recipients studies.

The organisation is not obligated to provide a recipient with common entitlements (such as leave entitlements) typically required by an employer. It does not receive services from a recipient and it is unable to direct a recipient to undertake the normal business activities. As determined in IT 2581, the provision of reports of academic progress is not a rendering of services by a recipient to a scholarship provider. The relationship between the organisation and a scholarship recipient is not indicative of an employer/employee relationship. Having regard to the relationship between the two, it is concluded scholarship recipients are not employees.

As no employment relationship exists the payments under the scholarship cannot be said to be made to an individual as an employee. Section 12-35 of the TAA will not apply. The scholarship payments do not fall within any other provision of the TAA requiring withholding. Withholding from scholarship payments will therefore not be required.

Vacation employment and work integrated learning programs

A distinction can be drawn between the payments made under the scholarship and payments made during vacation employment and/or work integrated learning programs. The scholarship payments continue regardless of whether vacation employment or work integrated learning programs are undertaken by a recipient. Payments made under these activities are separate and in addition to the scholarship payments. The nature of the scholarship payments is unaltered.

In DFC of T v Applied Design Development Pty Ltd (In Liq) [2002] FCA 205; (2002) 117 FCR 336; 2002 ATC 4193, Mansfield J stated in reference to section 12-35 of the TAA: It is the character of the payment which attracts the operation of the section.

Where scholarship recipients undertake vacation employment, the typical characteristics of an employer/employee relationship exist. When undertaking vacation employment, scholarship recipients are (short term) employees. Withholding will be required under section 12-35 of Schedule 1 to the TAA from payments made during vacation employment but only in respect of payments attributable to the vacation employment. Because the character of the scholarship payments is unaltered by a recipient engaging in vacation employment, withholding will not be required from scholarship payments during the period(s) of vacation employment.

It is necessary to examine the individual circumstances of any work integrated learning program in order to determine whether scholarship recipients are employees whilst undertaking the program. The circumstances may vary between courses, education providers and the arrangements upon participants in any program. If, under a work integrated learning program, the relationship between a recipient and the organisation is one of employee / employer, withholding will be required in respect of payments to a recipient under section 12-35 of Schedule 1 to the TAA. As the character of the scholarship payments is unaltered by a recipient's participation in the program, withholding will not be required from scholarship payments during the period of participation.

Other Issue Types of payments under the scholarship

The scholarship provides for payments as follows:

(a)   a living allowance;

(b)   an incidental allowance and

(c)   a study allowance.

The quantum and timing of the payment depends upon the type of payment.

As previously noted, under section 12-35 of the TAA, withholding is required from payments of salary, wages, commission, bonuses or allowances paid to an individual as an employee. The character of the payment determines whether withholding is required under section 12-35 of the TAA. For the reasons outlined, withholding is not considered to be required from the scholarship payments because the payments are not paid to an individual as an employee. It is therefore unnecessary to consider the characteristics of individual components of the scholarship payments for the purposes of section 12-35.

Question 2

Summary

Yes the living allowance will be assessable income to the assisted student.

Detailed reasoning

Tax is levied on the taxable income (TI) of taxpayers derived during the income year. The TI is calculated by deducting from the taxpayer's assessable income (AI) all allowable deductions. AI consists of ordinary income and statutory income pursuant to subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA97). An amount of ordinary income will not be AI however if the amount is made exempt or is otherwise excluded from AI. In the provided circumstances, the relevant provision is paragraph 23(z) which reads as:

"income earned by way of scholarship, bursary or other educational allowance or educational assistance (other than assistance provided by the Commonwealth for secondary education or assistance provided by the Commonwealth in connection with the education of isolated children) by a student receiving full-time education at a school, college or university, but not including -

(i) an amount received by a student from a person or authority upon condition that the student will (or will if required) become, or continue to be, an employee of the person or authority;

(ia) an amount received by a student from a person or authority upon 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;

(ib) an amount received by a student under a scholarship where the scholarship is not provided principally for educational services;

(ii) a Commonwealth education or training payment (see subsection 6(1)); or

Note: Although the payment is not exempt from income tax under this paragraph, the whole or part of the payment may be exempt under section 24ABZF.

(iii) an education entry payment received under Part 2.13A of the Social Security Act 1991;-

In FC of T v Ranson, 89 ATC 5327, Davies and Hill JJ said at page 5327:

"Section 23(z), it must be noted, is conditional upon the relevant scholarship, bursary or allowance being income. It may be possible to conceive of an educational allowance, paid in a lump sum or even periodically as being in a particular case a mere gift and accordingly as not having the character of income in ordinary concepts. Generally, however, a scholarship or bursary will be income because it consists of a series of periodical receipts".

The living allowance paid in fortnightly payments is AI according to ordinary concepts because:

· the aim of the Scholarship is to provide support for students to pursue their studies;

· it is awarded for the length of the course provided certain conditions are met;

· the recipient is bonded as an employee to the organisation providing the scholarship for a period once the course is completed;

· periodicity, recurrence or regularity is not always essential for an amount to be AI;

To satisfy the requirements of paragraph 23(z), three elements must be present:

1) There must be no condition present that the recipient will render or be required to render a service to the scholarship provider.

2) The recipient must be a student receiving full- time education at a school, college or university; and

3) The payment must be a scholarship, bursary or other educational allowance or educational assistance.

It is considered that element 1 is not satisfied pursuant to Income Tax Ruling IT 2581 because that ruling states at paragraph 10 that "where a […] scholarship holder is only required to provide an annual progress report, the scholarship income is exempt from tax", but not where the scholarship holder is required to render service to scholarship provider.

In these circumstances, the conditions to render service to the scholarship provider include the bonding of the student at the completion of the course in addition to the vacation employment as set out in the contract.

As the Scholarship does not satisfy all the three elements, the Scholarship is not exempt pursuant to paragraph 23(z).

Question 3

Summary

No the payment of HECS-HELP is not a fringe benefit.

Detailed reasoning

The definition of fringe benefit within sub-section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) defines a fringe benefit to mean a benefit:

(a) provided at any time during the year of tax;

(b) provided in respect of the year of tax being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(f) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include………

The definition goes on to provide that benefits listed in paragraphs (f) to (s) will not be fringe benefits.

Therefore, the payment will be a fringe benefit if the following criteria are satisfied:

· the benefit will be provided to the employee or an associate of an employee

· the benefit will be provided by:

- the employer;

- an associate of the employer, or

- a person other than the employer or an associate of the employer under an arrangement, or a situation that comes within paragraph (ea) of the fringe benefit definition

· the benefit will be provided in respect of the employment of the employee; and

· the benefit is not listed under paragraphs (f) to (s) of the definition of fringe benefit.

Will a benefit provided?

The term benefit is defined in subsection 136(1) of the FBTAA to include:

"any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money".

Section 20 of the FBTAA describes the circumstances under which an expense payment benefit will arise as follows:

"Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph(a), or the reimbursement referred to in paragraph(b), shall be taken to constitute the provision of a benefit by the provider to the recipient"..

As you are proposing to make the payment of the scholarship recipients HECS liability directly to the relevant tertiary institution you will be providing an expense payment benefit under paragraph 20(a) of the FBTAA.

Will the benefit be provided to an employee or an associate of an employee?

The term employee is defined under subsection 136(1) as:

(a) a current employee;

(b) a future employee; or

(c) a former employee

Current employee is also defined under subsection 136(1) as a person who receives or is entitled to receive, salary or wages.

As we have already determined that scholarship holders are not employees they will not be considered to be current employees.

However, the scholarship contract states that the scholarship recipient will if required serve as an employee upon the completion of their studies.

A future employee is a defined in subsection 136(1) as a person who will become a current employee.

Award wages will be paid to the recipient when they become an employee.

Therefore scholarship recipients are considered future employees as they will become current employees upon completion of their studies for the period of their bonded service.

Will the benefit be provided in respect of the employment of an employee by an employer?

The phrase in respect of in relation to the employment of an employee is defined in subsection 136(1) of the FBTAA to include by reason of, by virtue of, for or in relation directly or indirectly to, that employment.

The meaning of this phrase was considered by the Federal Court in J & G Knowles v. Federal Commissioner of Taxation [2002] 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles) and Starrim Pty Ltd v. Federal Commissioner of Taxation [2000] FCA 952; 2000 ATC 4460; 44 ATR 487 (Starrim).

In Knowles the Full Federal Court considered the judgements in Smith v. FCT (1987) 164 CLR 513; 19 ATR 274; 87 ATC 4883 and Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 31 ATR 392; 95 ATC 4691 before concluding that it is not sufficient for the purposes of the FBTAA to conclude that there is a causal connection between the benefit and the employment.

At paragraph 26 the Court said:

"Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment".

 At paragraphs 28 and 29, the Court said:

"While the width of the definition of fringe benefit was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit. In particular, the fact that a benefit is provided to a director because it was authorised by that director will not, of itself, be sufficient to characterise the benefit as one which is in respect of the employment. Without more, it is not a product of incident of that office".

"To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the FBTAA merely to enquire whether there is some causal connection between the benefit and the employment: see FCT v Rowe (1995) 60 FCR 99 at 114 and 123; 31 ATR 392 at 404 and 412; 95 ATC 4691 at 4703 and 4710. Although Brennan, Deane and Gaudron JJ observed in Technical Products (at 47), that the requisite connection will not exist unless there is some discernible and rational link between the 2 subject matters which the statute requires to be linked, as was pointed out by Dawson J (at 51), the connection must be material".

In applying this decision, it is necessary to determine whether the scholarship recipient performs any employment duties and if there is a link between the receipt of the scholarship and those employment duties.

The word employment is defined in subsection 136(1) of the FBTAA as follows:

"employment, in relation to a person, means the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that result or has resulted in the person being treated as an employee".

As stated previously, the organisation

· is not obligated to provide the scholarship recipient with common entitlements (such as leave entitlements);

· does not receive services from the scholarship recipient, and

· is unable to direct the scholarship recipient to undertake normal business activities.

As the scholarship recipient is not performing employment duties the payment of the HECS fees cannot be in respect of their employment.

Therefore the payment of the HECS fees will not be a fringe benefit.

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