Edited version of your private ruling

Authorisation Number: 1012554495219

Ruling

Subject: PAYG withholding

Question and Answer

1. Will PAYG Withholding be required from the payments made to full-time students?

No

This ruling applies for the following period<s>:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

01 July 2013

Relevant facts and circumstances

The students who will participate in the Program are completing the undergraduate university degree on a full-time basis.

The students will be placed at business premises to undertake part of their education as required by the university course rules.

The students will not be part of the paid workforce whilst on placement, students and staff of the university are to be treated as being in excess of the required number of staff and are not to be used to fill a position, relieve workloads or replace absentee staff.

Placements run throughout the year and in most cases continue throughout university holidays.

Whilst participating in the Program and pursuant to the Student Agreement, the Students will be entitled to an Education Allowance on a quarterly basis.

The amount of the Educational Allowance paid to a particular student is not correlated in any way to the time the student spends attending the clinical placement or the activities that they undertake during the Program. The Educational Allowance is paid principally for educational purposes.

A written agreement with each student provides:

· the Student in the degree on a full-time basis, is entitled to participate in the Placement, receive the Study Allowance and is unemployed.

· the participation in this Placement does not constitute employment or guarantee or secure the Student a permanent employment position upon completion of the degree.

· payment of the Education Allowance will only occur if, at the time the payment is to be made, the Student is enrolled in the degree on a full-time basis and on Placement.

· the Agreement does not (and is not intended to) impose any obligation on the Student to provide labour. It is for the advancement of the Student's education only.

· If the Student is suspended from the Placement for any reason whatsoever, no further payment of the Education Allowance will be paid to the Student until such time as the suspension is lifted.

· If the Student discontinues their enrolment in the degree or if the Student fails any Course, the Student:

(a) will not receive any Education Allowance nor any pro rata payment of the Education Allowance:

(b) will not be required to reimburse any Education Allowance which they have received prior such event happening.

· The Education Allowance will be paid on a quarterly basis.

Where there are more applicants than positions two levels of criteria are used to determine which applicants are accepted into the program.

Relevant legislative provisions

Taxation Administration Act 1953

Subsection 12-1(1) of Schedule 1

Income Tax Assessment Act 1997

section 6-5

subsection 6-5(1)

subsection 6-20(1)

division 51

section 51-1

section 51-10

section 51-35

paragraph 51-35(a)

paragraph 51-35(b)

paragraph 51-35(c)

paragraph 51-35(d)

paragraph 51-35(e)

paragraph 51-35(f)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Summary

PAYG Withholding is not required from the Education Assistance payment made to full-time students undertaking placements as the payments are exempt income of the students.

Detailed reasoning

Subsection 12-1(1) of Schedule 1 to the Taxation Administration Act 1953 contains a general exemption from withholding if the payment is exempt income of the entity receiving the payment. The initial step is therefore to determine whether the scholarship payments are exempt income in the hands of a scholarship recipient.

Ordinary income

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

The legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124 at 138; 90 ATC 4413 at 4420; (1990) 21 ATR 1 at 7 the Full High Court stated:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income, as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. (Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 95 ATC 4691; (1995) 31 ATR 392) Amounts paid in substitution for salary or wages foregone or lost may also be ordinary income. (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540 at 568; (1952) 10 ATD 82 at 92; (1952) 5 AITR 443 at 456 (per Fullagar J).

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 at 526; (1966) 14 ATD 286 at 293; (1966) 10 AITR 367 at 375; Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47 at 55; (1956) 11 ATD 68 at 73; (1956) 6 AITR 248 at 254; Federal Coke Co Pty Ltd v. Federal Commissioner of Taxation (1977) 34 FLR 375 at 402; 77 ATC 4255 at 4273; (1977) 7 ATR 519 at 539).

The whole of the circumstances must be considered (Squatting Investment Company Limited v. Federal Commissioner of Taxation (1953) 86 CLR 570 at 627-628 per Kitto J.) and the motive of the payer may be relevant to this consideration. (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 at 527, 528; (1966) 14 ATD 286 at 293; (1966) 10 AITR 367 at 376.)

Educational Allowance payments received by the student are ordinary income, being periodical receipts that are expected and relied upon by the student.

Exempt income

Subsection 6-20(1) provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Amounts of ordinary income and statutory income are exempt from income tax under section 51-1 if the amount is of a type listed in the tables in Division 51, subject to any exception or special condition.

Item 2.1A in the table in section 51-10 provides that payments are exempt from income tax if:

(a) they are made to a full-time student at a school, college or university;

(b) they are made by way of a scholarship, bursary, educational allowance or educational assistance; and

(c) they are not subject to the exceptions set out in section 51-35.

As the payments are ordinary income, it must be established whether or not they are exempt income under Division 51. This requires a consideration of these three conditions.

Are Educational Assistance recipients full-time students at a school, college or university?

In these circumstances, it is accepted that the students undertaking the full-time program at the university satisfy this criteria.

Are the payments made by way of scholarship, bursary, educational allowance or educational assistance?

The words 'scholarship, bursary, educational allowance or educational assistance' are not defined in the ITAA 1997. The Macquarie Dictionary , 1991, 2nd Revised Edition, defines 'scholarship' as 'the sum of money or other aid granted to a scholar' and 'scholar' as 'a student who, because of merit, etc, is granted money or other aid to pursue.....studies'. 'Student' is defined as 'one who is engaged in a course of study and instruction at a college, university, or professional or technical school' and 'one who studies a subject systematically or in detail'.

Paragraphs 34 to 48 of Taxation Ruling TR 93/39 Income tax: friendly society education funds discuss the meaning of the words 'scholarship, bursary, educational allowance or educational assistance' for the purposes of the former paragraph 23(z) of the Income Tax Assessment Act 1936 . Paragraph 35 of TR 93/39 states that the words are no more '...than a description of rewards for merit attained as a result of competition or selection on the basis of general criteria...'.

In interpreting the meaning of the words 'scholarship, bursary, educational allowance or educational assistance', courts have determined that the relevant characteristics of a scholarship include:

· the selection of recipients based on merit or some other rational criterion; Re Leitch (deceased) [1965] VR 204.and

· the education of the recipient is at least one purpose for which the scholarship is provided. Federal Commissioner of Taxation v. Hall (1975) 6 ALR 457; 75 ATC 4156; (1975) 5 ATR 450.

To be awarded Education Assistance, students have to undertake a competitive selection process which involves them being assessed against criteria. As such, it is accepted that selection for Education Assistance is merit based.

In Chesterman v. Federal Commissioner of Taxation (1923) 32 CLR 362 (at 385-6).Isaacs J said that for purposes to be educational they must provide for the giving or imparting of instruction.

The Education Assistance is paid to a student enrolled in the degree and the purpose of the clinical placement is to enable students to be trained in relevant skills. It is accepted that the Education Assistance has the requisite educational purpose.

Accordingly, it is accepted that Education Assistance payments are made by way of 'a scholarship, bursary, educational allowance or educational assistance'.

Do the exceptions in section 51-35 apply?

Section 51-35 excludes the following payments from exemption:

· payments by the Commonwealth for education or training: paragraphs 51-35(a), 51-35(b) and 51-35(f);

· payments made on the condition that the student will (or will if required) become an employee of the payer: paragraph 51-35(c);

· payments made on the condition that the student will (or will if required) enter into a contract with the payer that is wholly or principally for the labour of the student: paragraph 51-35(d); and

· payments made under a scholarship that is not provided principally for educational purposes: paragraph 51-35(e).

Are the payments Commonwealth education or training payments?

The Education Assistance payments are not of a kind covered by paragraphs 51-35(a), 51-35(b) or 51-35(f).

Are the payments made on the condition that the student will (or will if required) become or continue to be an employee of the payer?

Paragraph 51-35(c) excludes payments from exemption if they represent:

a payment by an entity or authority on the condition that the student will (or will if required) become, or continue to be, an employee of the entity or authority.

The Federal Court has taken the view that the words 'upon condition that' do not require a contract between the parties to exist or any other form of legal relationship. (Federal Commissioner of Taxation v. Ranson (1989) 25 FCR 57; (1989) 90 ALR 533; 89 ATC 5322; (1989) 20 ATR 1652).It was held that the exemption did not apply where, as a matter of ordinary language, it could be said that the receipt of the scholarship amount was conditional on the recipient working with the payer if the payer so required.

Under the degree, students are required to participate in placements. The placements are an integral part of the degree.

The terms of the agreements put the student under no obligation (whether or not legally binding) to become an employee of any entity in the future, or to do so if required.

The Education Assistance payments are therefore not excluded from exemption under paragraph 51-35(c).

Are the payments made on the condition that the student will (or will if required) enter into, or continue to be a party to, a contract with the payer that is wholly or principally for the labour of the student?

Paragraph 51-35(d) excludes payments from exemption if they represent:

a payment by an entity or 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 entity or authority that is wholly or principally for the labour of the student.

Paragraph 51-35(d) imposes a similar requirement to that of paragraph 51-35(c) by excluding employment-like relationships, that is, contracts wholly or principally for labour.

It is recognised that work performed for an organisation can be part of an education program. (Federal Commissioner of Taxation v. Hall 75 ATC 4156 at 4164 and 4162).

In circumstances where work is carried out solely or primarily for an educational purpose and its results are not calculated to benefit the organisation but are incidental products of the study program, there is no contract wholly or principally for the labour of the student.

The placement is solely to provide clinical education to the student during their degree.

Students will not be part of the paid workforce whilst on placement, students and staff of the university are to be treated as being in excess of the required number of staff and are not to be used to fill a position, relieve workloads or replace absentee staff.

The payments under the program are therefore not excluded from exemption under paragraph 51-35(d).

Are the payments provided principally for educational purposes?

The payments are awarded to a student to enable them to complete their particular degree at the university.

It is accepted that the Education Assistance payments are made principally for educational purposes. The payments are therefore not excluded from exemption by paragraph 51-35(e).

Conclusion

Accordingly, the quarterly Education Assistance payments made to a student are exempt under item 2.1A of the table in section 51-10.