Edited version of your written advice

Authorisation Number: 1051327225253

Date of advice: 19 January 2018

Ruling

Subject: PAYG Withholding

Question

Is the entity required to withhold PAYG withholding amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from payments made to recipients three scholarships?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

In 2018, the entity will be offering to students the following three scholarship programs.

Scholarship One:

● For high-achieving individuals who are already studying or intend to study an initial undergraduate or postgraduate qualification.

● Recipients are full time students (not employees of the entity).

● Recipients will receive financial assistance to assist with study and other expenses during study period.

● The entity will provide assistance in securing professional experience placements.

● Guaranteed permanent employment upon completion of their qualification

● There are four scholarship categories available:

● Secondary School Graduates – Recipients must have completed Year 12 in 2017 and be commencing or continuing an undergraduate program in Semester 1, 2018.

● Postgraduate Students – Recipients must already hold a degree in a relevant field and be commencing or continuing a postgraduate program in Semester 1 in 2018.

● Entity Employees – recipients must be employed with the entity and be enrolled, commencing or continuing an undergraduate or postgraduate program in Semester 1, 2018.

● Post-School Studies – Recipients must be enrolled, commencing or continuing an undergraduate or postgraduate program in Semester 1, 2018 and do not meet the eligibility criteria for any of the above categories, for example mature age students.

Scholarship Two

● XX scholarships will be offered to high achieving recipients who will finish their final year qualification as an undergraduate or postgraduate.

● Recipients are permanent employees of the entity.

● Recipients will receive financial assistance to support with their study expenses and their transition to a new role.

● Permanent employment is offered to recipient at the time the scholarship is granted.

Scholarship Three

● XX scholarships provided to support employees (working in a different role) to gain a further qualification and must already hold an undergraduate/postgraduate degree.

● Recipients are permanent employees and have a choice of full-time or part-time study with the degree.

● Recipients will receive financial assistance to support their study expenses and the transition to a new role.

● The entity will provide assistance in securing professional experience placements.

● Guaranteed permanent employment upon completion of their degree.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1

Income Tax Assessment Act 1997 section 51-10

Income Tax Assessment Act 1997 section 51-35

Reasons for decision

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides that:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

The term 'employee' is not defined in the TAA 1953, therefore it has its ordinary meaning. In most cases. Principally the relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services.

Section 12-35 of Schedule 1 to the TAA 1953 is subject to three general exceptions listed in section 12-1 of Schedule 1 to the TAA 1953:

● an entity need not withhold an amount under section 12-35 where the whole of the payment is exempt income of the entity receiving the payment;

● in working out how much to withhold, the payer may disregard so much of the payment as is a living-away-from-home allowance benefit as defined by section 136 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986); and

● in working out how much to withhold, the payer may disregard so much of the payment as is an expense payment benefit as defined by section 136 of the FBTAA 1986 and is not an exempt benefit by virtue of the operation of section 22 of that Act which relates to cents per kilometre payments for motor vehicles.

In this case, the first dot point is of greatest relevance.

Exempt Income

Item 2.1A of section 51-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that income derived by a student receiving full-time education at a school, college or university by way of scholarship, bursary, educational allowance or educational assistance is exempt from income tax, provided it is not a payment of a type listed in section 51-35 of the ITAA 1997. The following payments are listed under section 51-35 of the ITAA 1997:

(a) a payment by the Commonwealth for assistance for secondary education or in connection with education of isolated children;

(b) a Commonwealth education or training payment;

(c) a payment by a person or an authority on the condition that the student will (or will if required) become, or continue to be, an employee of the person or authority;

(d) 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;

(e) a payment under a scholarship where the scholarship is not provided principally for educational purposes;

(f) an education entry payment under Part 2.13A of the Social Security Act 1991.

In relation to the entities’ scholarship programs, the following circumstances apply:

● Scholarship One recipients (in the categories of Secondary School Graduates, Post Graduate Students, or Post School Studies) are not employees (full-time students) at the time the scholarship instalments are paid, but are guaranteed employment following their graduation.

● Scholarship One recipients (in the category of Entity Employees) are existing employees, but are completing study at the time the scholarship instalments are paid, and are guaranteed employment following their graduation.

● Scholarship Two recipients are already employees completing their final year of their qualifications. They have not commenced employment as an employee in a new role, but will on completion of the program.

● Scholarship Three recipients are existing employees (working in a different role) but will be offered employment in a new role upon completion of their education. There is a choice of full-time or part-time study for the recipient.

Accordingly, under paragraph 51-35(d) of the ITAA 1997, the scholarships are not exempt from income tax, as the payments are made on the condition that the recipients will become, or continue to be, an employee of the entity.

For Scholarship Three recipients, there is an option for the recipient to choose full-time or part-time study. As per section 51-10 of the ITAA 1997, the recipient must be a full-time student in order for the income to be exempt. Therefore there is no income tax exemption for Scholarship Three awarded to part-time students.

As the amounts received by the recipients are not considered to be exempt income, as the payments are made on the condition that the recipients will become, or continue to be, an employee of the entity, the entity must withhold an amount from payments made to the recipients under section 12-35 of Schedule 1 of the TAA 1953.

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