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Edited version of your written advice

Authorisation Number: 1013069172693

Date of advice: 9 August 2016

Ruling

Subject: Scholarships

Questions and Answers

1. Is the University required to withhold tax from the fortnightly stipend payments made by them to students enrolled in the program under arrangement one and two as described in this ruling?

2. Can the University withhold tax from the fortnightly stipend payments made by them to students enrolled in the program under arrangement three as described in this ruling?

3. Is the University required to withhold tax from the project support funds paid to students enrolled in any of the three arrangements described in the ruling?

This ruling applies for the following period

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commenced on

1 July 2015

Relevant facts

The university offers scholarship to full-time PhD students undertaking the program.

Under the program the university seeks funding and research projects that are necessary to support the students to complete their studies. The industry sponsor (sponsor) provides financial support to assist the students to achieve these outcomes.

The scholarship is a specific amount per annum (indexed annually by CPI) which is provided by the sponsor for up to three and a half years. The scholarship funds are paid directly to the university so the student does not receive any program payments directly from the sponsor.

The university pays the amount to students as a living allowance (stipend) on a fortnightly basis (scholarship payments).

The sponsor also provides financial support (project support funds) for project costs e.g. to purchase equipment for the project. This money will be held by the university and made available to the student for those expenses. The project support funds will only be reimbursed to the student on production of a receipt.

There is no agreement between the student and the sponsor as the university considers that the most appropriate way to facilitate the relationship is to have an agreement between the university and the student and the university and the sponsor.

The program is advertised publicly by the university (using the same promotion used for general scholarships). In general terms:

The program is offered under three different arrangements.

Arrangement one

The terms of arrangement one (as outlined in the Program Agreement Term Sheet) include:

Arrangement two

Arrangement two differs from arrangement one as follows:

Arrangement three

Arrangement three differs from arrangement one as follows:

When on a placement as part of the program:

On successful completion of the program the student obtains their PhD.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 51-10

Tax Administration Act 1953 Division 12 of Part 2-5 of Schedule 1

Reasons for decision

Pay as you go (PAYG) withholding requirements

Division 12 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) governs the PAYG system and outlines when an entity must withhold amounts from payments made to people.

When we look at PAYG withholding obligations, we firstly need to determine whether tax is payable on the payments. We therefore need to determine firstly if the scholarship payments (the stipend payment and program support funds) are assessable income.

Assessable Income

A payment or other benefit received by a taxpayer is assessable income if it is:

Ordinary income

Subsection 6-5(1) provides that an amount is included in your assessable income if it is income according to ordinary concepts (i.e. ordinary income).

The legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation, the Full High Court stated:

Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income, as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. Amounts paid in substitution for salary or wages foregone or lost may also be ordinary income.

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered and the motive of the payer may be relevant to this consideration.

The scholarship payments received by a student are considered to be ordinary income, being periodical receipts that are expected and relied upon by the student.

However, the project support funds are not assessable as ordinary income under section 6-5 as they are not periodical receipts that are relied on by the student. The project support funds are direct reimbursements of actual expenses incurred by the student as part of the education course. They are not ordinary income or statutory income under section 15-2 of the ITAA97.

Exempt income

Subsection 6-20(1) provides that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Amounts of ordinary income and statutory income are exempt from income tax under section 51-1 if the amount is of a type listed in the tables in Division 51, subject to any exception or special condition.

Item 2.1A in the table in section 51-10 provides that payments are exempt from income tax if:

As the scholarship payments are ordinary income, it must be established whether or not they are exempt income under Division 51. This requires a consideration of these three conditions.

Are scholarship holders full-time students at a school, college or university?

Students undertaking a full-time course at university may undertake training or study at an external site. However there must be a sufficient connection between any study undertaken at external sites and the related university course. Where a student engages in external work or study which only partially relates to a university course, it may be the case that the student is not considered to be studying at the university full-time.

Having regard to these circumstances, it is accepted that students undertaking the program satisfy the condition of being a full-time university student. However if at any point the student changes to a status that is not full time, this condition will not be satisfied.

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

The words 'scholarship, bursary, educational allowance or educational assistance' are not defined in the ITAA 1997. The Macquarie Dictionary, contains the following definitions:

Paragraphs 34 to 48 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 paragraph 23(z) of the Income Tax Assessment Act 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...'.

In interpreting the meaning of the words 'scholarship, bursary, educational allowance or educational assistance', Courts have determined that the relevant characteristics of a scholarship include:

To be awarded a scholarship, applicants have to undertake a competitive selection process which involves them being assessed against a range of criteria such as their academic achievements and interpersonal skills. As such, it is accepted that selection for the scholarship is merit based.

In Chesterman v. Federal Commissioner of Taxation Isaacs J said that for purposes to be educational they must provide for the giving or imparting of instruction.

The scholarship is paid to a student enrolled in the program and the purpose of this program is to enable the student to complete their PhD project. As such, it is accepted that the scholarship has the requisite educational purpose.

Accordingly, it is accepted that the stipend payments made under the program is made by way of 'a scholarship, bursary, educational allowance or educational assistance'.

Do the exceptions in section 51-35 apply?

Section 51-35 excludes the following payments from exemption:

Are the payments Commonwealth education or training payments?

The payments made under the Scholarship are not of a kind covered by paragraphs 51-35(a), 51-35(b) or 51-35(f).

Are the payments made on the condition that the student will (or will if required) become or continue to be an employee of the payer?

Paragraph 51-35(c) excludes payments from exemption if they represent:

In Federal Commissioner of Taxation v Ranson, the Federal Court took the view that the words 'upon condition that' did not require a contract between the parties to exist or any other form of legal relationship. It was held that the exemption did not apply where, as a matter of ordinary language, it could be said that the receipt of the scholarship amount was conditional on the recipient working with the payer if the payer so required.

The terms of the scholarship and the agreement put the student under no obligation (whether or not legally binding) to become an employee of the university or the sponsor in the future, or to do so if required.

The scholarship payments under the program are therefore not excluded from exemption under paragraph 51-35(c).

Are the payments made on the condition that the student will (or will if required) enter into, or continue to be a party to, a contract with the payer that is wholly or principally for the labour of the student?

Paragraph 51-35(d) excludes payments from exemption if they represent:

Paragraph 51-35(d) imposes a similar requirement to that of paragraph 51-35(c) by excluding employment-like relationships, that is, contracts wholly or principally for labour.

It is recognised that work performed for an organisation can be part of an education program.

Nature of the relationship between the student and sponsor organisation

In order to determine whether paragraph 51-35(d) applies to exclude the scholarship payments from exemption it is necessary to determine the nature of the relationship between the payer (the sponsor) and the recipient (the student).

Under the program, the sponsor makes a payment of the agreed amount to the university. Any unspent monies must be repaid to the sponsor. Any amounts that not used for the purpose specified by the sponsor must also be repaid.

Accordingly, although the university makes the payments to the student, they are doing so as agent or trustee of the sponsor and it is the sponsor that is the payer of the scholarship payments [see Hall's case; also Case D72 72 ATC 422 for an example of agency]. Therefore, for the purposes of paragraph 51-35(d) it is the relationship between the student and the sponsor that needs to be considered.

Arrangement one and two

In circumstances where work is carried out solely or primarily for an educational purpose and its results are not calculated to benefit the organisation but are incidental products of the study program, there is no contract wholly or principally for the labour of the student.

Under arrangement one and two, the student and the university respectively own the intellectual property that is produced during the program. As such, it is accepted that under these arrangements, any benefits to the sponsor are an incidental product of the program. Therefore there is no contract wholly or principally for the labour of the student.

Accordingly, the scholarship payments are not excluded from exemption under paragraph 51-35(d).

Arrangement three

Under arrangement three, the sponsor exclusively owns the intellectual property that is produced during the program. While the benefits to the sponsor under arrangement three are not an incidental product of the program, it is accepted that the relationship between the student and the sponsor is not wholly or principally for the labour of the student.

Therefore the scholarship payments are not excluded from exemption under paragraph 51-35(d).

Are scholarships provided principally for educational purposes?

In Chesterman v. Federal Commissioner of Taxation Isaacs J said that for purposes to be educational they must provide for the giving or imparting of instruction.

In Federal Commissioner of Taxation v. Hall (Hall's case) Rath J considered that, in relation to the former section 23(z) of the ITAA 1936, the relevant purpose is that of the scholarship payer. (Refer to paragraphs 65 to 67 for a discussion in relation to who is the payer).

The scholarship payments are paid to a student enrolled in the program. The scholarship payments are made to assist the student to undertake their PhD. Therefore, it is accepted that the payments have an educational purpose.

It is accepted that under arrangements one and two, the scholarship payments are provided principally for education purposes and accordingly paragraph 51-35(e) will not exclude these payments from exemption.

However, it is not accepted that the scholarship payments under arrangement three are provided principally for educational purposes. The university is paying the student fortnightly from funds provided by the sponsor who is obtaining the intellectual property that the student produces during the program. During the time the student participates in the program, it is expected that the results could be of significant benefit to the sponsor, through the work the student is undertaking. Although the work undertaken by the student may be influenced by the educational requirements of the student, the primary purpose of the sponsor is more likely to obtain the services of a high achieving student. In reality, the student is being paid for the resulting intellectual property rather than for undertaking 'study'.

Therefore, it is considered that the sponsor is providing the funding to the university for the scholarship payments to be paid to the student in order to obtain the intellectual property of a student, rather than a more benevolent purpose of assisting the student's education.

Accordingly, paragraph 51-35(e) will exclude the scholarship payments made under arrangement three from exemption.

PAYG Withholding

As the scholarship stipend in arrangements one and two and the project support funds under each of the three arrangements are not assessable there is no requirement for the university to withhold from these payments.

However, the university can withhold from stipend payments made to a student under the third arrangement as these payments are assessable. There is nothing in taxation law that prevents this. The Commissioner supports the university in their decision to withhold amounts according to the appropriate tax tables as it good administrative practice, supports the recipients with their tax affairs and encourages participation in the tax system.

Where amounts are withheld, the university will issue a payment summary to these students at the end of the year.


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