Edited version of private ruling

Authorisation Number: 1011807752295

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Ruling

Subject: PAYG withholding and assessability of scholarship

Question and answer:

Are you required to withhold an amount under section 12-35 of Schedule 1 to the Tax Administration Act 1953 (TAA) from the payment you make to a scholarship recipient completing a PhD?

No.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2011

Relevant facts:

You are a professional, not for profit organisation.

You seek to offer a full-time scholarship to further knowledge in your area of expertise.

The scholarship will be provided principally for educational purposes.

You will award the scholarship on a competitive basis for a person enrolled or eligible to enrol at any Australian university that has suitably qualified staff to supervise research.

You will have no ownership of any intellectual property generated by this scholarship and will gain no financial benefit.

The scholarship will not impose any condition on the recipient to be an employee of your organisation or to enter into a contract with your organisation to provide labour.

The scholarship can only be awarded to an Australian or New Zealand citizen, Australian permanent resident or a person with a valid international student visa.

Relevant legislative provisions:

Tax Administration Act 1953 Section 12-35

Income Tax Assessment Act 1997 Section 51-10

Income Tax Assessment Act 1997 Section 51-35

Reasons for decision

Part 2-5 (sections 10-1 to 20-80) of Schedule 1 to the TAA relates to the PAYG withholding system.

Section 12-35 of Schedule 1 to the TAA 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 employee).

However, subsection 12-1(1) of Schedule 1 to the TAA provides that an entity need not withhold an amount under this section from a payment if the payment is exempt income or non-assessable non-exempt income of the entity receiving the payment.

We therefore need to determine if the scholarship payment is exempt income or non-assessable non-exempt income in the hands of the scholarship recipient. If the scholarship payment is considered exempt income of the recipient then you will not be required to withhold an amount under the PAYG withholding system.

Section 51-10 of the ITAA 1997 provides that if you are a full-time student at a university and receive a scholarship, bursary, educational allowance or educational assistance, then the amount received is exempt from tax. This is subject to the conditions contained within section 51-35 of the ITAA 1997.

Section 51-35 of the ITAA 1997 provides that 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.

You intend to award your scholarship to a full time university student. It is your intention in providing the scholarship that the recipient can further develop knowledge in your area of expertise in Australia. You will have no claim on the knowledge or research findings that arises from the work of the recipient and you are not providing the scholarship to further your own purposes or meet your own organisation's needs. The principal purpose in providing the scholarship is therefore educational and not personal. You are not imposing any condition on the recipient to be an employee of your organisation or to enter into a contract with your organisation to provide labour.

As the conditions attached to the scholarship will satisfy all the above requirements, the income will be exempt from taxation in the hands of the recipient under section 51-10 of the ITAA 1997.

Therefore, under subsection 12-1(1) of Schedule 1 to the TAA, you will not be required to withhold any amount when paying the scholarship to the recipient.