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Ruling

Subject: scholarship

Question 1

Are the payments you will receive from a scholarship exempt from income tax?

Answer

No.

Question 2

Are the payments you will receive from a scholarship included in your assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You intend to undertake a course of study.

You have been offered a scholarship.

The agreement details that over a period you will be entitled to payments under the scholarship.

It is a condition of the scholarship agreement that you become an employee of the organisation offering the scholarship upon completion of your studies.

Another condition of the agreement requires you to repay the financial assistance received if you resign within a certain period after commencing permanent employment with the organisation or if you withdraw from the course.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5(1),

Income Tax Assessment Act 1997 section 6-5(2),

Income Tax Assessment Act 1997 section 51-10 and

Income Tax Assessment Act 1997 section 51-35.

Reasons for decision

Summary

The scholarship does not fulfil the special conditions set out in section 51-35 of the Income Tax Assessment Act 1997 (ITAA 1997). Therefore, the scholarship money you will receive is not exempt from income tax under section 51-10 of the ITAA 1997.

The scholarship payments are expected, relied upon and will be received periodically. Therefore, the payments are considered ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Question 1

Subsection 6-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts, referred to as ordinary income.

However, if an amount is exempt income, then it is not included in the assessable income of a taxpayer (section 6-15 of the ITAA 1997).

Item 2.1A of the table in section 51-10 of the ITAA 1997 provides that, 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. This is subject to the exceptions and special conditions contained within section 51-35 of the ITAA 1997.

For a scholarship to be exempt from income tax:

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

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

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

In your case you have been offered a scholarship. It is a condition of the scholarship that you become an employee of the organisation upon completing your studies. Another condition of the scholarship is that you continue your employment with the organisation for a certain period; otherwise you are required to repay the scholarship monies. The scholarship does not fulfil the special conditions set out in section 51-35 of the ITAA 1997. Therefore, the scholarship money you will receive is not exempt from income tax under section 51-10 of the ITAA 1997.

Question 2

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of ordinary income that have evolved from case law include receipts that are earned, expected, relied upon and have an element of periodicity, recurrence or regularity.

In your case, the scholarship payments you are entitled to will be received periodically during your participation in the scholarship program. The payments are expected and will be relied upon by you. Therefore, the scholarship payments you receive are considered ordinary income under section 6-5 of the ITAA 1997.