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Ruling

Subject: assessable income- scholarship

Question

Is the amount you have received under a scholarship assessable income?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are to graduate at a university with a degree.

You have applied for and received a scholarship.

The scholarship was paid by a provider.

The scholarship has been paid in instalments.

The scholarship is an incentive of the provider to attract graduates willing to work in areas of identified need.

You have provided a copy of the signed agreement which lists the conditions of the scholarship. These include:

a) you must have completed a degree within the agreed specified time frame.

b) Meet the minimum requirements for employment with the provider.

c) Be recommended for permanent employment.

d) Obtain registration in your occupation following the successful completion of your degree.

e) Apply for ongoing positions relevant to your qualifications in their nominated regions.

f) You agree to remain in employment in the nominated regions for at least two years.

In the event that you resign within a specific period after commencing permanent employment with the provider or withdraw from the course it will be deemed a breach of the agreement and repayment of some or all of the financial assistance will be required.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Subsection 15-2(1)

Income Tax Assessment Act 1997 Section 51-35

Reasons for decision

Ordinary Income

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts, which is called ordinary income.

Relevant factors in determining whether a payment is ordinary income include whether the payment is for services rendered, such as from personal services, and the character of the payment in the hands of the recipient.

Taxation Ruling IT 2639 defines income from personal services as income that a taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour.

Other characteristics of income that have evolved from case law include receipts that:

a) are earned

b) are expected

c) are relied upon, and

d) have an element of periodicity, recurrence or regularity.

The payment of the scholarship that you received is not income from personal services. The payment is not earned, as it is a requirement that you have not yet commenced work to receive the payment, and it was not expected or relied upon as you had to apply for it and you may not have been successful. The payment also has no element of periodicity, recurrence or regularity, in the respect that it is a one off payment.

Therefore, the character of the payment is not ordinary income under subsection 6-5(1) of the ITAA 1997.

Other types of assessable income

Section 15-2 of the ITAA 1997 deals with allowances and other things provided in respect of employment or services and provides a far broader test of what constitutes income than that provided by section 6-5. Subsection 15-2(1) 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).

The key phrase here is 'in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you'. Although your scholarship is not ordinary income, it was received in relation to employment services rendered by you. This is because receipt of the scholarship was in consequence of your taking paid employment.

Taxation Ruling TR 1999/17 offers further clarification of this point. Although it deals with receipts and other benefits obtained by sportspeople, its provisions can be applied to income earners generally. Under the heading 'Income and benefits received by an employee' paragraph 21 states (in part):

Payments which are assessable income include salary, wages, bonuses, allowances, sign-on fees, inducement or retention payments….

In your case, the offer and receipt of the scholarship was in the nature of an inducement payment because the scholarship scheme is an incentive of the provider to attract graduates willing to be employed in identified areas of need.

Although the receipt of the scholarship was not income in the ordinary sense it is nevertheless assessable income under section 15-2 of the ITAA 1997 because it was received in relation to your employment and would not have been received but for that employment.

Exempt income

Subsection 51-35 (d) of the ITAA 1997 specifically states that payments are not exempt from income tax if a payment by a person or any authority on the condition that the student will (or will if required) enter into, or continue to be a party to, a contract with the person or authority that is wholly or principally for the labour of the student.

In your circumstances you signed an agreement to work for a provider full-time for a specific period in a nominated region. Therefore, the payment you have received is not an exempt scholarship.