Edited version of your written advice

Authorisation Number: 1012907211843

Date of advice: 9 November 2015

Ruling

Subject: PAYG withholding and FBT obligations

Question 1

Will a Pay-As-You-Go Withholding obligation arise in relation to the living allowance provided to the fellows who come to Australia under a specific agreement?

Answer

No.

Question 2

Will the living allowance provided to the fellows who come to Australia under the specific agreement be a living-away-from-home allowance fringe benefit?

Answer

No.

Question 3

If the answer to question 2 is yes, will the taxable value of the fringe benefit under section 31B of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) be nil?

Answer

As the answer to question 2 is no, this question will not be answered.

This ruling applies for the following periods:

I July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have a contractual agreement with the Australian Government agency to bring individuals (fellows) located in developing countries to Australia, provide them with training in particular fields and then send them back to their home country so they can implement their education.

The fellows selected are in a position to make short to medium term advances on issues of regional development importance.

The training program consists of the fellows attending a university where papers are presented regarding forestry, agriculture, shifting cultivation and water resources and their respective responses to climate change, followed by intensive discussion with the attendees.

The purpose of the fellowships is to provide these individuals with high quality, flexible, responsive and continuing access to Australian ideas or expertise.

You are responsible for managing the affairs of the fellows whilst they are in Australia, including travel arrangements, accommodation, medical insurance and training costs. Additionally you prescribe the day-to-day activities of the fellows whilst hosting them.

The Australian Government Agency provides you with funds to cover all costs associated with the fellows including some component of "per diem" or "living allowance" at a rate prescribed by the Australian Government Agency. You are required to pay the 'living allowance', as a pre-determined daily amount, to the fellows to compensate them for the additional expenses incurred whilst living away from their home country. The fellows do not receive a salary.

The fellows are residents of a foreign country and are non-residents of Australia for taxation purposes. There is no student relationship between you and the fellows.

The payments under the Australian Government Agency agreement are in relation to fellows from countries that Australia currently does not have a double taxation agreement (DTA) with.

The fellows are granted a temporary visa (subclass 456, 576 or similar) under their agreement with the Australian Government Agency which allows the individual to work up to 20 hours per week whilst their course is in session. However, there are no restrictions in place during prescribed course breaks.

The duration of a fellow's stay is generally between 1-3 weeks, but can extend up to 42 days in a limited number of cases.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 6-5

Section 6-10

Section 6-20

Section 11-15

Subsection 15-2(1)

Subdivision 842-B

Section 842-105

Fringe Benefits Tax Assessment Act 1986

Subsection 30(1)

Section 31

Section 31B

Subsection 136(1)

Taxation Administration Act 1953

Schedule 1

Division 12

Subsection 12-1(1)

Section 12-35

Reasons for decision

Issue 1

Question 1

Division 12 of schedule 1 of the Taxation Administration Act 1953 (TAA) sets out the types of payments from which an amount must be withheld.

However, this is subject to section 12-1 of schedule 1 of the TAA which sets out the general exceptions where withholding is not required.

Included in the exceptions is a payment that is exempt income of the entity receiving the payment. In relation to these payments subsection 12-1(1) of schedule 1 of the TAA which states:

An entity need not withhold an amount under section 12-35, 12-40, 12-45, 12-47, 12-50, 12-55, 12-60, 12-80, 12-85, 12-90, 12-120 or 12-190 from a payment if the whole of the payment is *exempt income of the entity receiving the payment.

Exempt income is defined in section 6-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Under subsection 6-20(1) an amount of ordinary income or statutory income is exempt income if it is exempt from income tax by a provision of the Income Tax Assessment Act or another Commonwealth law.

The provisions that list exempt income are summarised in sections 11-5, 11-10 and 11-15 of the ITAA 1997.

For the purpose of this ruling the relevant list is that contained in section 11-15 which refers to the exemption provided in section 842-105 of the ITAA 1997 for a scholarship, bursary or other educational allowance provided by the Commonwealth.

Section 842-105 of the ITAA 1997 states:

The amounts of ordinary income and statutory income covered by the table are exempt from income tax.

Item 7 of the table in section 842-105 states:

If you are:

(a) a foreign resident pursuing in Australia a course of study or training; and

(b) in Australia for the sole purpose of pursuing that course

the following amounts are exempt from income tax:

your *ordinary income, and your *statutory income, by way of a scholarship, bursary, or other educational allowance, provided by the Commonwealth.

In considering the requirements of this section:

Are the payments made to a foreign resident pursuing a course of study or training in Australia?

This requirement is satisfied as each of the fellows is a foreign resident who is in Australia to undertake a training program.

Is the course the sole purpose for coming to Australia?

This requirement is satisfied as the sole purpose for the fellows coming to Australia is to undertake the training course.

Are the payments a scholarship, bursary or other educational allowance provided by the Commonwealth?

The words 'scholarship', bursary' and 'educational allowance' are not defined in the ITAA 1997. However, the meaning of the words 'scholarship, bursary, educational allowance or educational assistance' for the purposes of the former paragraph 23(z) of the ITAA 1936 is discussed in paragraphs 34 to 45 of Taxation Ruling TR 93/39 Income tax: friendly society education funds.

Paragraphs 35 to 46 of TR 93/39 state:

35. There has never been an expressed intention that the words 'scholarship, bursary or other educational allowance' be any more than a description of rewards for merit attained as a result of competition or selection on the basis of general criteria; what appeared to be in contemplation were scholarships, fellowships, prizes and bursaries and the like. There is no indication that the words 'educational allowance' were to have any different meaning than the words which preceded them nor that they be any more than a paraphrase of alternative rewards.

36. The Explanatory Memorandum to the Income Tax and Social Services Contribution Assessment Act 1951 (Act No 44 of 1951, inserting paragraph 23(z)), said that the:

'purpose of [the amendment] is to give effect to a recommendation by the Commonwealth Committee on Taxation that income arising from scholarships and similar educational awards should be exempt from income tax... The exemption will apply...to payments under various private scholarships and similar educational awards...'. [emphasis added].

The Second Reading Speech used similar terminology.

37. The concept of 'educational assistance' was introduced into the paragraph in 1985. There was no intention to broaden the scope of the paragraph. In fact, the words were inserted to enable two specific forms of assistance to be excluded from the paragraph. This is confirmed by the Explanatory Memorandum to the Taxation Laws Amendment Act (No 3) 1985 (Act No 168 of 1985).

38. The component words in 'scholarship, bursary or other educational allowance' have had some judicial consideration. For example, in Re Leitch, deceased, 1965 VR 204, which dealt with 'scholarship', Adam J said (at 206):

'...I am not prepared to hold that according to common usages of speech, or by reason of any authoritative definition, the word "scholarship", in the absence of expressed purposes or conditions attached to it, connotes anything more than a grant of an emolument, normally in a sum of money, to a scholar selected on merit or upon some other rational criterion'.

39. Although obiter , the statement recognises the need for there to be some rationale (or criterion) for granting a scholarship: see also Case G 56 (1985) 7 NZTC 1247, at 1250; Reid v. Commissioner of Inland Revenue (1985) 7 NZTC 5176, at 5190; Case L 30 (1989) 11 NZTC 1181, at 1187. Such recognition is consistent with the explanations of the provision when it was inserted as paragraph 23(z). It would not, it is suggested, be satisfied by a payment merely because, for example, the student is nominated by a member of an education fund to receive such benefits as the member's contributions and accounts allow.

40. In the further case of Wicks v. Firth [1983] 2 W.L.R. 34, the House of Lords addressed a trust for the award of scholarships in which, in the words of Lord Templeman;

'It is the policy of the trustees to see that all eligible applicants receive by way of scholarship basic awards which make up the difference between maintenance grants made by the local educational authorities and the assessed maintenance requirements of the students, save for a sum of 300 pounds which may then be made up by merit awards or hardship awards by the trustees' (at 40).

41. The intentions were clearly that there be criteria as there had to be applicants who were eligible (i.e. satisfy criteria) for the basic awards and who could also receive awards on merit or on the satisfaction of hardship criteria. The awards were conceded by all parties to be scholarships within the meaning of section 375(1) of the Income and Corporation Taxes Act 1970 (U.K.), a provision similar to paragraph 23(z). The facts of the case do not, however, parallel those of arrangements discussed in this Ruling.

42. In another case, FC of T v. Hall 5 ATR 450, at 459; 75 ATC 4156, at 4164, Rath J, in the Supreme Court of NSW, said:

'It is true that the exemption in s 23(z) relates to income in the hands of the scholar and not to deductibility from income of the benefactor, and that this may be thought to provide a reason for looking at the character of the receipt from the point of view of the purposes of the scholar. Though there may be logic in this approach, I think it is inconsistent with the ordinary understanding of the phrase "scholarship, bursary or other educational allowance". In its ordinary meaning that collocation of words connotes a character in the income that attaches to it apart from and irrespective of the use the student makes of the money . A scholarship is a scholarship even if the student spends it on marijuana; income of the student derived from his own rent producing properties is not exempted from his assessable income by s 23(z) even if he devotes it to his education' [emphasis added].

43. That case is therefore authority for the proposition that the proper approach is to determine the correct character of the receipt. It can, on that basis, be distinguished from In re Compton. Powell v. Compton [1945] 1 Ch 123, which merely concerns itself with application of certain trust funds, including scholarship funds, by trustees.

44. In FC of T v. Ranson 89 ATC 4353; 20 ATR 488, a case turning on the meaning in subparagraph 23(z)(i) of 'upon condition that', Gummow J adopted without dissent the dicta of Adam J in Re Leitch as to the meaning of 'scholarship'. On appeal to the Full Federal Court (Davies, Jenkinson and Hill JJ) (reported in 89 ATC 5322; 20 ATR 1652), Re Leitch was not referred to and Gummow J's interpretation of the word was not disturbed. In fact, as appears from the judgment of Davies and Hill JJ, there was agreement between the parties that the sum paid to the taxpayer was income derived by way of scholarship, bursary or other educational allowance.

45. Neither FC of T v. Hall nor FC of T v. Ranson addresses the issue of the need for criteria but nothing in either case indicates a contrary view.

Ejusdem generis rule

46. The words 'other educational allowance or educational assistance' in the phrase should be read ejusdem generis with the words 'scholarship' and 'bursary' on a similar basis to the decision in Canwan Coals Pty Ltd v. FC of T (1974) 4 ALR 223; 74 ATC 4231. There, Sheppard J held that the words 'or other facility' in ' a railway, road, pipeline or other facility' in s123A(1) of the ITAA had to be read ejusdem generis and that a storage facility was not covered. None of the cases referred to earlier on the application of paragraph 23(z) were (or needed to be) decided by reference to that rule. cf. Case C 40, 71 ATC 175.

The Macquarie Dictionary, 2^nd Revised Edition, defines 'scholarship' as 'the sum of money or other aid granted to a 'scholar' and 'scholar 'as' a student; who because of merit, etc., is granted money or other aid to pursue … studies'

The payments are an allowance that is paid to the fellows to assist with their living expenses while they are in Australia undertaking the training. In applying the above extract from TR 93/39 it is accepted that they are an educational allowance.

As the allowance is provided by an Australian Government body it is accepted that the payments are an educational allowance provided by the Commonwealth.

Therefore, as each of the requirements of item 7 of the table in section 842-105 are met, the payments will be exempt income.

As the payments are exempt income, subsection 12-1(1) of schedule 1 of the TAA provides there will not be a withholding requirement.

Question 2

For a fringe benefit to arise there needs to be an employee and an employer.

The definition of employer in the FBTAA is a person who pays or is liable to pay salary or wages.

Subsection 136(1) of the FBTAA 1986 defines salary or wages as:

(a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; and

(b) a payment from which an amount must be withheld (even if the amount is not withheld) under section 12-47 in Schedule 1 to the Taxation Administration Act 1953 where:

(i) the payment is made by a religious institution; and

(ii) the activity, or series of activities, for which the payment is made is done by the religious practitioner as a member of the religious institution.

Therefore, for a person to be an employer they must make a payment from which an amount must be withheld. As you do not have a withholding obligation, you will not be an employer for the purposes of the FBTAA and the payments cannot be a fringe benefit.

Question 3

As the answer to question 2 is no, it is not necessary to answer this question.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).