Edited version of private advice

Authorisation Number: 1052254181287

Date of advice: 23 May 2024

Ruling

Subject: Assessable income

Question

Does the receipt of a fellowship payment from an overseas university form part of your assessable income under subsection 6-5 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

Background information

1.      You are an Australian resident and have been employed as a senior academic at an Australian university since YYYY.

2.      In response to an open call, you applied for, and were awarded in MM YYYY, a fellowship from an overseas university (the Fellowship).

3.      Between DD MM and DD MM YYYY, you were on approved sabbatical leave from the Australian university. During this period, you maintained your full-time employment with the Australian university and were on full pay.

4.      During your sabbatical leave, you were hosted by the overseas university. You spent xxx months at the overseas university. You were not employed by the overseas university and instead had a guest status.

•         You also travelled as part of your sabbatical leave.

5.      Under the Fellowship, you received the following:

•         xxx paid in three instalments on DD MM YYYY of xxx, DD MM YYYY of xxx and DD MM YYYY of xxx, and

•         an invitation for a guest stay of xxx months at the overseas university.

Guidelines for the Fellowship (the Guidelines):

6.      The Guidelines for the Fellowship (the Guidelines) explain the framework for the Fellows' guest stay with the overseas university.

7.      The Guidelines provide that the overseas university supports outstanding scientists who want to conduct a joint research project with host scientists from the overseas university through its fellowships.

8.      Fellowships are awarded to renowned scientists who work at universities or research institutions abroad, based on selection criteria, and the academic excellence of both you and the cooperative project.

9.      The purpose of the Fellowship is to support outstanding scientists who want to carry out a research project in close cooperation with researchers at the overseas university.

10.   The Guidelines provide that Fellows are considered to be associate members of the overseas university's research centre.

11.   The overseas university's research centre, as per the Guidelines, asks each associate member and their host to submit a final written report on the research project at the conclusion of the program. You state that there are no binding research deliverables associated with the Fellowship.

12.   Additionally, the Guidelines provide that the xxx award should allow the Fellow to carry out a research project together with their host and could be used to cover project-related costs, including travel and expenses.

•         Your host also was entitled to a grant of either xxx or xxx pursuant to the Guidelines.

13.   The Guidelines provide that reference to the Fellowship should be made in publications resulting from the funded research project. Additionally, the overseas university's research centre must be notified of the publications.

14.   The Fellowship payment was not subject to tax overseas.

Information provided

15.   You have provided a number of documents containing detailed information in relation to your application including:

•         Private binding ruling application dated DD MM YYYY.

•         An appendix titled 'Guidelines for the fellowship at the overseas university' dated DD MM YYYY.

16.   We have referred to the relevant information within this document in applying the relevant tests to your circumstances.

Assumptions

Not applicable

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Further issues for you to consider

Not applicable

Reasons for Decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question:

Does the receipt of a fellowship payment from an overseas university form part of your assessable income under subsection 6-5 of the Income Tax Assessment Act 1997?

Summary:

In accordance with the Commissioner's view in Taxation Ruling IT 2612 Income tax: assessability of fellowship moneys received from an overseas university, your Fellowship payment will form part of your assessable income under section 6-5. As such, it is required to be reported as taxable foreign sourced income in your income tax return for the income year ended DD MM YYYY.

Detailed Reasoning

17.   Subsection 6-5(1) provides that your assessable income includes income according to ordinary concepts, which is known as 'ordinary income'.

18.   Guidance on the ordinary meaning of a term can be found with reference to dictionary definitions. The Oxford English Dictionary defines income as "periodical (usually total annual) receipts from one's business, lands work, investments and so on". Similarly, the Macquarie Dictionary defines income as "the returns that come in periodically, especially annually, from one's work, property business, etc; revenue; receipts, or something that comes in".

19.   However, dictionary definitions do not necessarily have the force of law and without further guidance by definition in the legislation, reference to case law is required for a proper understanding of the meaning of a term. While the courts have not applied a strict definition to income, a number of characteristics have been identified to provide the basis in determining whether a receipt is income.

20.   The main characteristics that are generally applicable to a receipt being considered as income are:

•         received periodically and regularly

•         received for personal services (for example, salary and wages)

•         received from property and investment returns (for example, dividends and interest)

•         relied upon or expected

•         earned

•         for the replacement of income, and

•         derived by way of a profit-making intention or carrying on a business.

21.   Therefore, ordinary income generally bears a direct relationship to some form of input or investment made by the taxpayer. It is important to note, however, that it is not necessary for all of these characteristics to exist in order for a receipt to be considered under ordinary concepts.

22.   Subsection 6-5(2) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

23.   Taxation Ruling IT 2612 Income tax: assessability of fellowship moneys received from an overseas university (IT 2612)[1] supports the principle that assessable income includes all payments incidental to an employment, whether they are paid by the employer or from another party and are obtained as a right or merely as a recognised incident of the employment or work. Where the payment is sufficiently connected with the income earning activities of a taxpayer, it is more correctly characterised as income.

24.   The Commissioner issued IT 2612 in response to the decision in Case V135 88 ATC 855 (Case V135) as the Commissioner considered that the decision in this case was incorrectly decided as the Administrative Appeals Tribunal did not make any reference in its reasons to the decision in Kelly v. FC of T 85 ATC 4283; 16 ATR 478 (Kelly's case).

25.   In Kelly's case, Franklyn J said that in his opinion, the payment to the taxpayer was directly related to his employment by the club as a footballer. In considering the nexus between the employment and the benefit, his Honour referred to the joint judgment of Dixon CJ and Williams J in FC of T v. Dixon (1952) 86 CLR 540 where it was said:

it is clear that if payments are really incidental to an employment, it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognised incident of the employment or work.

26.   IT 2612 contends that the taxpayer in Case V135 was primarily able to apply for and to secure the fellowship because she was a member of the academic staff of her home university and, that as a result, the fellowship payments were incidental to that employment.

27.   Franklyn J stated the following in Kelly's case:

The fact that it was open to any player in the league to win the medal and the money was obvious and recognised, and in my view was a fact incidental to the employment of such players.

28.   In determining whether a fellowship is income according to ordinary concepts, the courts have established that consideration of the whole of the circumstances is necessary and the following factors need to be taken into account:

•         how, in what capacity, and for what reason the recipient received the fellowship[2]

•         whether the fellowship is of a kind which is a common incident of the recipient's calling or occupation[3]

•         whether the fellowship is made voluntarily

•         whether the fellowship is solicited[4]

•         whether the fellowship can be traced to gratitude engendered by some service rendered by the recipient[5]

•         the motive of the donor of the fellowship (though this factor is rarely decisive in itself),[6] and

•         whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants.[7]

Application to your circumstances

29.   You were awarded the Fellowship in recognition of your proven track record of academic excellence in your field of expertise. Under the Fellowship, you received three payments which consisted of xxx received on DD MM YYYY, xxx received on DD MM YYYY and xxx received on DD MM YYYY. Therefore, during the xxx months of your Fellowship, you received payments that were periodical and regular.

30.   In accordance with the Guidelines, the total payment of xxx was made to allow you to carry out the research project together with your host and could be used to cover project-related costs, including travel and expenses. Therefore, you expected the payments and relied upon it to undertake your research or spend in which ever manner you saw fit.

31.   You earned the total of xxx and were required to provide services to the overseas university by contributing to its research program and submitting a report after the conclusion of the program. As such, the Fellowship payment relates to personal services you rendered to the overseas university.

32.   Consequently, the amounts you received through your Fellowship have the general characteristic of ordinary income.

33.   Moreover, having to the factors established by the courts in determining whether fellowship amounts constitute income under ordinary concepts:

•         you were able to apply for and secure the Fellowship by virtue of your employment as a senior academic at the Australian university

•         Fellowship applicants were limited to renowned scientists who work at universities or research institutions abroad while satisfying a selection criteria

•         you solicited the Fellowship

•         the Fellowship was made voluntarily

•         to receive the Fellowship payment, you had to submit an application that addressed a selection criteria and detail the academic excellence of both you and your host

•         the overseas university's research centre is promoting its research program by awarding you the Fellowship payment as the Guidelines state that the overseas university is required to be referenced when the funded research project appears in publications

•         although you are required to show sufficient proof acceptable to the overseas university of your eligibility and satisfaction of the selection criteria, you received a one-off award of xxx paid over three instalments.

34.   As such, the Fellowship is a product of your employment, which was the substantial reason why the Fellowship was paid, and the benefits received were incidental to your employment.

35.   In accordance with IT 2612, the Fellowship payment is regarded as ordinary income for the purposes of subsection 6-5(1). The Fellowship payment that you have received relates to the research services you provided to the overseas university to promote its academic research. By reason of your employment as a senior academic at the Australian university, the Fellowship enabled you to acquire additional knowledge, enhance your research profile and undertake a research project on a topic of interest with an overseas host. As a result, there is a connection between your labour, skill, and employment as a senior academic that led to being awarded the Fellowship payment.

36.   As you are an Australian resident and the xxx was sourced from your Fellowship at an overseas university, that is a source outside of Australia, you will be required to include this amount in your assessable income in the income year ended DD MM YYYY in accordance with subsection 6-5(2).

[1] IT 2612 relates to former subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which is similar to the current provision in subsection 6-5(2) but applied prior to the income year ended 30 June 1998. IT 2612 is still relevant and can be relied upon for guidance as it provides the Commissioner's interpretation on the application of the law in respect of whether fellowship moneys are assessable income.

[2] Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570; (1953) 5 AITR 496 (Squatting Investment case).

[3] Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367 (Scott's case).

[4] Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248 (Hayes' case) and Scott's case.

[5] Squatting Investment case.

[6] Hayes' case.

[7] Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443.

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