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Ruling

Subject: Bursary payments

Question 1

Are amounts paid from the bursary scheme to the children of employees subject to fringe benefits tax (FBT)?

Answer

No

Question 2

Are the payments that the company makes from the bursary scheme tax deductible to the company?

Answer

No

This ruling applies for the following periods:

Question 1

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Question 2

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The company intends to establish a bursary fund.

Payments from the fund will only be made in relation to the education expenses of children who meet the following criteria:

· the recipient must be the child of an employee of the company.

· the recipient must be a certain age or younger when the application is made.

· payments will only be made towards the cost of tuition fees.

· payments will only be made in respect of study at recognized educational institutions.

· payments will only be made in respect of undergraduate studies for the recipient's initial degree.

· evidence of expenditure needs to be provided.

· payments will only be made for initial years of study - repeat years of study either in full or for individual subjects will not be paid.

· recipients must forward a copy of their exam results when received.

There is an application process and not all children of employees will be successful.

There is no requirement that the student will become an employee of the company.

There is also no requirement that the employee continue to be an employee of the company once the bursary has been awarded to the employee's child.

Relevant legislative provisions

Income Tax Assessment Act 1936 (ITAA 1936) paragraph 26(e)

Income Tax Assessment Act 1997 (ITAA 1997) section 8-1

ITAA 1997 subsection 15-2(1)

ITAA 1997 section 51-10

ITAA 1997 section 51-35

Fringe Benefits Tax Assessment Act 1986 (FBTAA) subsection 136(1)

Reasons for decision

Question 1

Are amounts paid from the bursary scheme to the children of employees subject to FBT?

Summary

The payments are not subject to FBT as they are not provided to either the employee in respect of their employment or to the student in respect of future employment.

Detailed reasoning

Subsection 136(1) of the FBTAA requires that the benefit be 'provided to the employee or to an associate in respect of the employment of the employee'.

In J & G Knowles & Associates Pty Ltd v. FC of T (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 ( Knowles case) the Federal Court considered the meaning of 'in respect of employment' in the FBTAA. The Court noted that what has to be established in determining if a benefit is 'in respect of employment' is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment.

The fact that recipients of the payments out of a bursary fund are all dependants of employees is merely an indication of a causal connection. It is not, of itself, sufficient to conclude that it is a sufficient or material connection. Regard must be had to the criteria that recipients must satisfy in order to be granted the assistance.

Except for the fact that the recipient must be a child of an employee every other criterion for eligibility and continuation of the educational assistance payments concerns itself with the personal and scholastic circumstances of the student. Recipients are chosen solely on the basis that they satisfy the criteria set out in the policy.

The Commissioner has previously considered the taxation implications for similar types of educational assistance payments and concluded that they may, in some circumstances, not be received in respect of the employment of the employee.

In Taxation Ruling IT 2177 Income Tax: Educational allowances paid by employers (or associated entities) in respect of the children of employees, the Commissioner stated that certain educational allowances would not be liable to income tax because of the application of paragraph 26(e) of the ITAA 1936 which stated in part:

(e) the value to the taxpayer of all allowance, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him

Paragraph 26(e) of the ITAA 1936 has been replaced by subsection 15-2(1) of the ITAA 1997 which states:

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

Paragraphs 2 to 4 of Taxation Ruling IT 2177 state:

Two situations have come to the attention of this office, however, where it has been accepted that paragraph 26(e) does not operate to make particular educational allowances paid by employers liable to tax.

The first of the situations involves the creation by an employer of a scholarship scheme for the benefit of children of all employees. The scheme does not involve the payment of educational allowances to all children of employees but only to those children who are successful in fulfilling the conditions under which a scholarship may be awarded.

Where a payment is in the nature of a bona fide scholarship or bursary and the conditions for awarding the scholarship or bursary depend on criteria other than the employment of the parent of the child to whom the award is made, eg. the scholastic ability of the child, the personal attributes of the child, etc., the payment will fall outside the operation of paragraph 26(e).'

The similarity between the terminology used in paragraph 26(e) of the ITAA 1936 and subsection 15-2(1) of the ITAA 1997 ('in respect of, or for or in relation directly or indirectly to, any employment of or services'), and that in subsection 136(1) of the FBTAA ('in respect of the employment of the employee') would indicate that a payment of bone-fide scholarship or bursary would not :provided to an employee in respect of their employment.

There appears to be four key aspects to satisfy in order for the payments of educational assistance to fall within the terms of the Commissioners view in IT 2177. Each of these is discussed in relation to the current scheme:

The scholarship or bursary is for the benefit of children of all employees: The policy provides for educational assistance payments for the benefit of children of all employees.

The scholarship or bursary scheme does not involve the payment of educational allowances to all children of employees, but only to those who are successful in fulfilling the conditions under which the scholarship may be awarded: The payment is not available to all children even though the selection criteria is broad.

The payment is in the nature of a bona fide scholarship or bursary: The Oxford English Dictionary describes a bursary as an endowment given to a student. Payments made under the policy satisfy this definition. It is evident from the policy that the payment is designed to assist students with their costs of education. There is nothing in the policy or the manner in which it is administered that could lead the Commissioner to conclude that the policy is anything other than a bona fide policy for providing educational assistance.

The conditions for awarding the scholarship or bursary depend on criteria other than the employment of the parent of a child to whom the award is made, eg, scholastic ability, personal attributes. ect: While the employees employment is a necessary qualification for eligibility, it is the personal attributes and circumstances of the dependant student which are determinative as to whether or not the dependant will be eligible under this policy. The student will not be eligible unless they are under a certain year of age and only available in their initial years. In other words is a student fails their course and has to repeat it the payment is not available

Therefore in applying the four key aspects of IT 2177 in respect of the fund, the payment from the fund would not be assessable income to an employee under subsection 15-2(1) of the ITAA 1997.

Where the payment is in a form that would possibly give rise to a fringe benefit (rather than as assessable income), that payment would not be a fringe benefit as it would also not be provided 'in respect of the employment of the employee'.

The student

If we look at the student as the recipient of the reimbursement then we would have to look at whether they might be a 'future employee' as defined in subsection 136(1) of the FBTAA.

In effect a future employee is someone who will eventually receive salary or wages from an employer.

In other words if one of the conditions of providing the bursary was that the employee would eventually be employed by the company the FBTAA could apply in respect of the student as a future employee.

However there is no requirement for the student to eventually become an employee of the company so the nexus between the student and future employment does not exist.

Question 2

Are the payments that the company makes from the bursary scheme tax deductible to the company?

Summary

The payments are not deductible as they are not necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Detailed reasoning

The deductibility of expenses is generally considered under section 8-1 of the ITAA 1997 which states:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income; or

(d) a provision of this Act prevents you from deducting it.

There are a number of court decision which set the tests that need to be satisfied in order for an expense it be incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. These tests are:

(a) it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T (1958) 100 CLR 478);

(b) there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47);

(c) it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; FC of T v. Hatchett (1971) 125 CLR 494).

In respect of the bursary payments the outgoing relates to the education of an individual and there is no evidence to suggest that the company earns its assessable income from the provision of education to others. Therefore we need to look at how a payment of the education expenses of a person is necessary to the company in earning its assessable income.

In looking at the student, there is no requirement that the student will become an employee of the company as a result of receiving the bursary. Therefore the company cannot expect to earn assessable income from making those payments. If the payments were linked to employment the payment would have been deductible but at the same time section 51-35 of the ITAA 1997 would apply to make the payment assessable in the hands of the student.

The only other was the payment could have been deductible under section 8-1 of the ITAA 1997 was if the payment was considered to be an employment expense of the student's parent. However in applying Knowles case and IT 2177 in respect of the application of the FBTAA we have already concluded that there is an insufficient nexus between the payment and the parent's employment.

The scholarship and award expenses are not deductible, as they are not incurred in gaining or producing assessable income of the company as they are not relevant or necessary to earning that assessable income.