Edited version of private ruling

Authorisation Number: 1011766715996

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Subject: Fellowship payments

Question 1

Are the fellowship payments you received exempt income in Australia?

Answer: No.

Question 2

Are you entitled to a deduction for living costs whilst in receipt of fellowship income?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You were offered a post graduate fellowship by an overseas charitable organisation.

The fellowship was provided principally for educational purposes.

You were required to write an article at the end of the period for the purpose of publication of the article in a journal that is distributed to libraries overseas.

You travelled overseas as part of your research project and incurred living expenses.

You remained an Australian resident.

There was no employment relationship between you and the fellowship provider.

You are not a full time student at a college or university.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 51-10.

Income Tax Assessment Act 1997 Section 51-35.

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

Income Tax Assessment Act 1936 Subsection 23AG(1)

International Tax Agreements Act 1953

Reasons for decision

A taxpayer who is an Australian resident for tax purposes is liable to Australian tax on ordinary income and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Refer to subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997).

Assessable income consists of ordinary income and statutory income. Ordinary income is income according to ordinary concepts.

The ITAA 1997 does not provide any further guidance on what is meant by ordinary income. Therefore to determine whether a particular type of receipt is ordinary income it is necessary to consider case law. The courts have found that the following factors are relevant:

· whether the payment is the product of any employment, services rendered, or any business

· whether the payment is expected and relied upon

· the character of the payment in the hands of the recipient

· whether the payment is received as a lump sum or periodically; and

· the motive of the person making the payment, although this is rarely decisive by itself.

It is not necessary for all the above indicators to be present for a receipt to be considered ordinary income.

The amounts you receive from your fellowship are considered to be ordinary income as they are periodic payments that you rely on.

Exemption under section 51-10 of the ITAA 1997

Certain amounts of ordinary income and statutory income are exempt from income tax under section 51-1 of the ITAA 1997 if the amount is of a type listed in the tables in Division 51 of the ITAA 1997.

Item 2.1A of the table in section 51-10 of the ITAA 1997 provides that, subject to the exceptions and special conditions contained within section 51-35 of the ITAA 1997, income received by way of a scholarship, bursary, educational allowance or education assistance by a full-time student at a school, college or university is exempt from income tax.

For the scholarship to be exempt from income tax: 

· the taxpayer must be a full-time student at a school, college or university

· the taxpayer must be in receipt of a scholarship and the scholarship must be provided principally for educational purposes, and

· there must be no condition that the taxpayer be an employee of the scholarship provider or enter into any contract with the scholarship provider that is wholly or principally for labour.

The fellowship income you receive is not exempt as you do not meet one of the essential requirements set down by section 51-10 of the ITAA 1997, that is, you must be a full-time student at a school, college or university.

Exemption under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)

Section 23AG of the ITAA 1936 has been amended from 1 July 2009 so that income earned from foreign service derived by Australian residents will only be exempt in certain circumstances.

Subsection 23AG(1AA) of the ITAA 1936 advises that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following:

· the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade);

· the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developing country disaster relief fund;

· the activities of the taxpayer's employer whether they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia;

· the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or

· an activity of a kind specified in the regulations (currently there are no specified activities listed in the regulations).

Broadly, the foreign service must be directly attributable to Australia's overseas aid program, a relief fund, an exempt institution or a disciplined force.

As your fellowship does not satisfy any of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936, the income is not exempt from tax under subsection 23AG(1) of the ITAA 1936. Furthermore, the fellowship payments are not in respect of foreign service as required by section 23AG of the ITAA 1936.

International tax agreements

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one.

The Agreements Act contains the tax treaty between Australia and the overseas country. The treaty operates to prevent fiscal evasion and avoid double taxation of income received by residents of both countries.

The treaty does not prevent Australia taxing the fellowship income received by an Australian resident individual. Therefore your fellowship income is assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Deductions against fellowship income

As a general rule, expenditure on meals and accommodation while working away from home is not allowed as a deduction. These costs are essentially 'living expenses' of a private or domestic nature. The fact that income cannot be earned unless certain expenses are necessarily incurred is not determinative of deductibility.

In FC of T v. Toms 89 ATC 4373; (1989) 20 ATR 466 the Federal Court disallowed a forest worker's deduction for the cost of maintaining a caravan and other living expenses. The taxpayer incurred the expenses in providing temporary accommodation at the base camp because the taxpayer had chosen to reside at a place far from the worksite. These expenses were dictated not by work but by private considerations.

You travelled overseas and incurred living expenses to undertake a research project whilst receiving fellowship income. The extra expenses of food and accommodation are considered to be of a private and domestic nature. They are incurred in order to enable you to carry out your research but are not incurred in the course of gaining or producing fellowship income.

Accordingly, you are not entitled to a deduction for living expenses.