Edited version of private advice

Authorisation Number: 1052223564434

Date of advice: 20 March 2024

Ruling

Subject: FBT - scholarships

Question

Are scholarships paid to the dependents of employees considered 'fringe benefits' for the purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

This ruling applies for the following periods:

Fringe Benefits Tax (FBT) year ending 31 March 2024

FBT year ending 31 March 2025

FBT year ending 31 March 2026

FBT year ending 31 March 2027

FBT year ending 31 March 2028

FBT year ending 31 March 2029

The scheme commenced on:

1 April 2023

Relevant facts and circumstances

The employer provides financial assistance, by way of an Education Allowance to the dependents of employees.

Dependents are eligible to receive the scholarship payments only after fulfilling a number of conditions.

The scholarship payments are paid directly to the dependent child and do not represent a reimbursement of actual costs incurred.

Eligibility includes all dependents of permanent employees.

The employee is responsible for making the scholarship application.

The following conditions shall apply to scholarships as per the Allowance Policy:

•         Assistance shall be granted only to employee dependent children whose parent is a permanent employee.

•         Assistance shall be granted only whilst attendance continues in a full-time approved course and shall cease immediately when studies are discontinued.

•         Assistance shall not exceed the minimum number of years required to complete the undergraduate course but not more than 4 years.

•         Assistance shall be proportional to the number of successfully completed module/courses from the previous semester.

•         The course of study is for a minimum of two years.

•         Employee dependents must submit an application form at the commencement of each academic semester, as they do not automatically qualify for assistance in subsequent semesters.

•         Students must pass/complete all subjects in the previous year/semester to be eligible for the full payment. Where an applicant has failed or dropped subjects in the previous year/semester, payment is on a proportional basis. For example: If a student advises they will be undertaking four (4) subjects in one (1) semester but only successfully pass/completed three (3) of those subjects, they will only be eligible for 75% of the full payment at the completion of the semester. The payment shall be payable only to the student.

•         Assistance will cease when studies are discontinued. Assistance may recommence when study resumes, provided that the interval of the break does not exceed 12 calendar months. Assistance shall not be granted for more than one discontinuance of full-time study.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 148(1)

Income Tax Assessment Act 1936 Section 318

Reasons for decision

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA, which provides that the following conditions must be satisfied:

•         a benefit is provided at any time during the year of tax

•         the benefit is provided to an employee or an associate of the employee

•         the benefit is provided by:

(i) their employer; or

(ii) an associate of the employer; or

(iii) a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or

(iv) a third party other than the employer or an associate of the employer, if the employer or an associate of the employer:

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

(B) 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;

•         the benefit is provided in respect of the employment of the employee

•         the benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of 'fringe benefit' in subsection 136(1).

A discussion is provided below in respect of whether each element or condition of the definition of a fringe benefit is satisfied.

A benefit is provided

Subsection 136(1) of the FBTAA provides a broad definition of a 'benefit' as including:

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 extraction;

(b) a contract of insurance; or

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

'Provide' in relation to a benefit is defined in subsection 136(1) of the FBTAA to include 'allow, confer, give, grant or perform'.

The giving or granting of an educational scholarship falls within the definition of a 'benefit' as defined in subsection 136(1) of the FBTAA.

As such, the first condition (i.e. the provision of a 'benefit') of the definition of a 'fringe benefit' - as defined in subsection 136(1) of the FBTAA - would be satisfied.

The benefit is provided to an employee or an associate of the employee

An 'employee' is defined in subsection 136(1) of the FBTAA to mean a current, future or former employee.

An 'associate' is defined in subsection 136(1) of the FBTAA as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

'Associates of a natural person' is defined in subsection 318(1) of the ITAA 1936 as follows:

For the purposes of this Part, the following are associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity of trustee):

(a) a relative of the primary entity; ...

As per the facts, the educational scholarship (the benefit) is to be provided to the dependent child of a current employee of the employer. As a relative of the employee, the dependent child will be considered an 'associate' of the employee.

Therefore, as the benefit (the provision of an educational scholarship) would be provided to an associate of an employee of the employer, the second condition (i.e. a benefit is provided to an employee or an associate of an employee) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would be satisfied.

The benefit is provided by an employer, an associate of the employer or a third party

'Employer' is defined in subsection 136(1) of the FBTAA to mean a current, future or former employer.

The benefit is provided by the employer only to dependent children who have a parent working for the employer in a permanent role.

Therefore, the third condition (i.e. the benefit is provided by an employer) has been satisfied.

The benefit is provided in respect of the employment of the employee

As per subsection 136(1) of the FBTAA, 'in respect of' in relation to the employment of an employee includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

Subsection 148(1) of the FBTAA stipulates that a benefit will be provided in respect of the employment of an employee:

(a) Whether or not the benefit is also provided in respect of, by reason of, by virtue of, or for or in

relation directly or indirectly to, any other matter or thing;

(b) Whether the employment will occur, is occurring, or has occurred;

(c) Whether or not the benefit is surplus to the needs or wants of the recipient;

(d) Whether or not the benefit is also provided to another person;

(e) Whether or not the benefit is, to any extent, offset by an inconvenience or disadvantage;

(f) Whether or not the benefit is provided or used, or required to be provided or used, in connection

with that employment;

(g) Whether or not the provision of the benefit is, or is in the nature of, income; and

(h) Whether or not the benefit is provided as a reward for services rendered, or to be rendered, by

the employee.

In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 (Knowles), the full Federal Court - in examining the meaning of 'in respect of' an employee's employment - held that the phrase required a 'nexus, some discernible and rational link, between the benefit and employment', though noted 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'.

The full Federal Court in Knowles also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'.

The Federal Court stated in McArdle, J.W v The Commissioner of Taxation for the Commonwealth of Australia [1988] FCA 93 (Mc Ardle) that:

In my opinion the passages cited indicate clearly that it is necessary to go beyond the historical or

temporal connection which had existed or presently existed between an employer and an employee. It is necessary to consider whether the taxpayer received the payment in any capacity other than that of employee, whether there was any consideration other than services rendered or to be rendered, and whether it could be said that the payment was in consequence only of the employee's service or of some other consideration.

Therefore, to consider whether there is a sufficient or material connection between the awarding of a scholarship to a student who has a parent who is an employee of the employer, it is necessary to determine whether the characterisation of the benefit can be said to be remuneration, and whether the benefit is a product or incident of the employment.

In the present circumstances, the following factors lead to a conclusion that there is not a sufficient or material connection between the provision of an educational scholarship to a student who has a parent who is an employee of the employer:

•         The scholarship does not involve the payment of educational allowances to all children of employees, only to those children who are successful in fulfilling the conditions under which a scholarship may be awarded.

•         The conditions for making a payment under the scholarship depend upon criteria other than the employment of the parent of the dependent to whom the award is made. More specifically, the dependent, rather than the employee, is required to meet the 'Conditions' listed in the scholarship policy.

•         Employee dependents must submit an application form at the commencement of each academic semester, as they do not automatically qualify for assistance in subsequent semesters or subsequent years, even though the initial application may have been successful (such that it is the actions of the employee's dependent, and not the employee themselves, that secures the scholarship).

•         The conditions do not take into account any of the work-related characteristics of the employee, such as their work performance, status, or seniority as an employee of the employer.

Although employment of the employee is a pre-requisite, it can be found that there is a mere causal connection between the benefit provided to the dependent and the employment of the employee. The conditions detailed in the Policy heavily depend on criteria other than the parent's employment, including:

(1)   the continuation of full-time studies by the dependent, with the exception of one period of discontinuance which must not exceed 12 calendar months

(2)   the dependent successfully completing all subjects in the previous period to be eligible for the full allowance, otherwise it will be paid proportionally to the subjects they completed successfully, and

(3)   the dependent submitting a form at the commencement of each academic semester and there is no guarantee they will continue to be granted if a scholarship is received previously.

It is therefore considered that:

•         the awarding of a scholarship to a student lacks a sufficient or material connection to that student's parent's employment, and

•         the provision of a scholarship to a student whose parent is an employee of the employer is not provided 'in respect of the employment of the employee'.

As such, the fourth condition (i.e. a benefit is provided in respect of the employment of the employee) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would not be satisfied.

Conclusion

As all of the conditions of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA are not satisfied, the provision of an educational scholarship to a student whose parent is an employee would not constitute a 'fringe benefit'.

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