Edited version of your private ruling

Authorisation Number: 1012609421129

Ruling

Subject: Payments received under a university program.

Question

Are the payments received through the Program exempt from income tax under item 2.1A in the table in section 51-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are enrolled as a full-time student at a university which offers a program what it considers a scholarship (the Program).

The Program involves students undertaking work placements with sponsoring organisations for approximately a year.

You wanted to supplement your academic knowledge by undertaking work experience, and to foster beneficial links with industry and business organisations.

You participated in the Program to help prepare for graduate employment by 'learning on the job'.

The Program allowed you the possibility to apply and consolidate knowledge gained at the university in the workplace, experience workplace culture and work practices, explore career options and develop a professional network. As you completed the Program while in the midst of your coursework, you have the opportunity to directly apply the industry knowledge you gain to subjects in your course.

The agreement entered into by the sponsoring organisation states that the sponsoring organisation will provide experience to the student in their discipline.

You were eligible for the program as you:

• are enrolled as a full time student at the university

• had completed a minimum number of subjects required

• attended a formal interview with the university, and

• attended a formal interview with the sponsor.

The university chose you for the Program based on the following:

• Your application

• Your academic results and achievements

• The outcome of your interview

• The sponsor shortlisted you according to its selection criteria

• It was at the discretion of the sponsoring organisation being the sponsor to make the final selection for you to complete the Program with them.

Not all eligible students are accepted into the Program.

The university invoiced the sponsor an amount for the Program fund.

The university allocated a weekly payment from the Program fund to you.

The total amount of payments you received under the Program (the Program payments) totalled the amount paid by the sponsor to the university for the Program fund less an administration fee.

The agreement stated that should you not undertake the placement to the satisfaction of the sponsor and the university, the sponsor may terminate the agreement and the university must repay the sponsor the unused portion of funds (if a suitable replacement cannot be found). This safeguard was in place to cater for extreme circumstances. For example, the agreement may be terminated if you were not attending your placement at the sponsor's premises or were clearly having a negative impact on the sponsor's professional work environment and performance due to inappropriate behaviour.

The requirements of the Program consist of the following:

• Full-time work (35-40 hours per week)

• Offer students experience in a project related to their studies;

• Provide supervision by an experienced manager

• Meet current minimum employment requirements regarding rate of pay and employment conditions

• Students are contracted for approximately 12 months with placements running across 2 semesters, and

• Students are expected to commit to the terms of the Program in relation to the terms of the length and requirements of the placement.

During the Program, you were required to complete assessment criteria in conjunction with your full-time work experience practices.

Your performance was assessed according to the university's assessment procedures and on the basis of:

• Reports

• Presentations

• Evaluations, and

• Site visits by your academic mentor.

During your work placement, you were entitled to sick leave, annual leave and time in lieu for working overtime.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 51-10.

Income Tax Assessment Act 1997 Section 51-35.

Reasons for decision

All legislative references that follow are to the ITAA 1997 unless otherwise stated.

Your assessable income includes amounts that are considered income in the ordinary sense of the word (ordinary income).

In your application for private ruling you concede that the payments through the Program are ordinary income. We agree with this view and therefore no further discussion is required on this point.

As the Program payments are ordinary income, they will be assessable unless they are made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

The exemption that requires consideration in this case is provided by Item 2.1A in the table in section 51-10 which states 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.

Failure to meet any one of the above conditions will mean that the Program payments are not exempt.

'Full-time student' - Item 2.1A, section 51-10

The term 'full-time student' is not defined. The Macquarie Dictionary (5^th Edition, 2009) defines 'full-time' as:

full-time

adjective 1. of, relating to, or taking all the normal working hours (opposed to part-time).

2. of, or relating to, something which occupies a person all the time.

3. Sport of or relating to the time at which play is to end: the full-time whistle.

-adverb 4. during all normal working hours.

-noun 5. Sport the time at which play is to end.

The issue has received very little judicial consideration. In Case 16/95 95 ATC 196; (1995) 30 ATR 1208 consideration was given to the phrase, however of concern in that case was whether a student could be 'full-time' if they failed to attend classes, submit assignments, sit exams etc. Senior Member Barbour concluded on the facts of that case that the taxpayer was a full-time student, concluding that 'I do not accept that the applicant was so deficient a student as not to be regarded as receiving a full-time education'.

The term has also been given judicial consideration in relation to the Social Security Act. In Secretary, Department of Social Security v. Jordan (1998) 83 FCR 34; (1998) 155 ALR 236; (1998) 49 ALD 496, Hill J said that the classification of the course as 'full-time' by a university is not necessarily conclusive and other factors such as required hours of attendance at classes, number of hours required to be spent at home on study and assignments etc also need to be taken into account. Hill J, then went on to state:

... The task of statutory interpretation, however, is not to define an expression in the abstract. The context in which the expression is employed will cast light on the meaning which parliament intended. In the present case the context is that of conferring upon unemployed applicants a benefit where they are seeking work. An applicant who is enrolled in a full time course of educational or vocational study is to be regarded as not able to participate in the full time work force and thus disentitled to the benefit. Hence in construing the expression "full time course of education" it will often be relevant to consider whether the course is so structured that it would be inconsistent with the ability of the applicant to become engaged in full time employment.

Thus, whether a person is enrolled in a full time course of study will involve an issue of fact and degree to which these factors will all be relevant. In my opinion, the classification by an institution cannot be the final answer. If it were, difficulties might arise were an institution to fail to classify a course or where the educational institution flies in the face of common sense and reality in classifying what might otherwise be thought to be a part time course as a full time course, or vice versa.

Division 51 replaced the previous exemption provisions found in section 23 of the Income Tax Assessment Act 1936 (ITAA 1936). The intention of the re-written provisions was to merely 'restate the effect of the ITAA 1936' (Taxation Laws Amendment Bill (No. 6) 1999, Explanation of the Amendments, Part 1 Amendment of the ITAA 1997, items 4 and 5).

The original section 23(z) of the ITAA 1936 was introduced to give effect to a recommendation contained in the Commonwealth Committee on Taxation, 1951, Report of the Commonwealth Committee on Taxation on Income Tax - Scholarships and Similar Payments for Educational Purposes (Reference No 11) (the Spooner report). The history to section 23(z) and the Spooner report recommendations was discussed at length in the majority judgment of Davies and Hill JJ in Federal Commissioner of Taxation v. Ranson (1989) 25 FCR 57; 89 ATC 5322; (1989) 20 ATR 1652. Davies and Hill JJ commented:

The committee's recommendation was substantially adopted although the language of the section introduced was not in the precise words of the committee's draft. Commenting on the exclusion to the exemption, the explanatory memorandum circulated at the time stated:

The exemption will not extend, however, to payments, whether termed 'scholarships' or otherwise, which are in effect payments in the nature of remuneration for present or future services. Allowances paid to research workers, for example, are indistinguishable in nature from salaries and will continue to be subject to tax and contribution. Similarly, allowances paid during periods of training for future employment -- such as public service cadetships, teachers' training college studentships, etc -- will not fall within the new exemption.

It can be seen both from the terms of the section itself and from the extrinsic material to which we have referred that it was the legislative policy that amounts received under schemes in the nature of cadetships, where the training in question is designed to prepare the recipient for his future job being in substance remuneration for employment or future employment, would remain assessable and only those payments which were divorced from present or future employment would be exempt from tax.

(emphasis added)

Whilst undertaking the work placement, you were enrolled as a full-time student at the university, and on successful completion of the placement you received credit points equivalent to undertaking a full-time 'class room' study load of four subjects. However, the course fee for the subject is set at 25% of a full-time load (the equivalent of one subject).

Although you were enrolled as a full-time student, it is arguable that during the period of the work placement, you were no longer in fact a full-time student because you were performing work for the vast majority (if not all) of your time.

You were attending the industry sponsor's workplace for your work placement during all normal working hours. Therefore the only 'full-time' role that you had was in that workplace, that is, there was no requirement for attendance at the university during normal working hours. Also, you were not required to undertake additional study 'out of hours' apart from completing a journal, report and papers relating to your placement.

As is concluded further below, you were engaged for the period of the placement by the sponsor principally to perform work and not principally for education, although there remained some aspects of education to the arrangement. It is arguable that you were neither a full-time worker nor a full-time student as there were aspects of both work and education and where work and education co-exist, you can't be full-time in either. This supports the view that you were not receiving full-time education during the period of the work placement.

'At a school, college or university' - Item 2.1A, section 51-10

Section 51-10 sets out that one of the requirements for the exemption to apply is that the student has to be 'at a school, college or university'. Similarly, section 23(z) of the ITAA 1936 contained the same requirement. A literal reading of this phrase would indicate that the actual education be delivered to the student on the physical premises of the school, college or university.

This argument is supported by the case of Re Muir v. Federal Commissioner of Taxation [2001] AATA 277; (2001) 2001 ATC 2143; (2001) 47 ATR 1006 (Re Muir). In that case, the 'scholarship' recipient received funds over two years from the Melbourne Microsurgery Foundation (the Foundation), which were paid through the Royal North Shore Hospital's (the Hospital) payroll system. The funds were paid to enable the taxpayer to undertake further studies, research and clinical work in the field of pain management, all of which were conducted at the Hospital. The studies were towards a Master of Medicine (Pain Management) degree at the University of Sydney and the College of Anaesthetists Certificate in Pain Management.

Senior Member Pascoe concluded that whilst the education was full-time and met other aspects required for exemption, it was not conducted at a university:

The funds constituted a scholarship. They were paid for educational purposes and what the taxpayer undertook constituted full time education. The taxpayer was under no obligation to provide future services to the Foundation. The work done by the taxpayer was only partially related to a university course of study. However, the Hospital, although associated with the University of Sydney, was not itself a university. Therefore, one requirement of s 23(z) of the ITAA 1936 that the education must be received at a school, college or university had not been met.

The English case of Barry v. Hughes (Inspector of Taxes) (1973) 1 All ER 537 looked at whether an intensive training unit (which involved the instruction of manual skills and a lesser amount of academic training) was a 'university, college, school or other educational establishment' within the meaning of sec 10 of the United Kingdom Income and Corporation Taxes Act 1970. In that case, the Court took the view that an educational establishment is 'an establishment whose primary function is that of education' and that education denotes training of the mind, as opposed to training in manual skills. As such, they found that the intensive training unit did not fit the concept of an educational establishment for the purposes of the Act. Even though this is an English case, it is considered that this principle was underlying the decision in Re Muir outlined above; that the Hospital was not an educational institution.

Re Muir supports a conclusion that any education which is imparted during the work placement is not education being delivered at a school, college or university. The sponsor's business is neither a school, college or university, nor an establishment whose primary function is that of education, even where there was some academic supervision by representatives of the university during the work placement. In Re Muir, the university provided academic supervision whilst the student was stationed at the Hospital, yet this did not alter the conclusion that the arrangement failed to be an exempt scholarship because the Hospital was not itself a school, college or university.

Therefore, even though there was an element of academic supervision, it is questionable whether any education delivered during your work placement at the sponsor's business premises, was delivered at a school, college or university and consequently, whether you were a student at a school, college or university during this time.

Payments by way of 'scholarship, bursary, educational allowance or educational assistance' - Item 2.1A, section 51-10

The words 'scholarship, bursary, educational allowance or educational assistance' are not defined in the ITAA 1997. The Macquarie Dictionary (5^th Edition, 2009) contains the following definition:

scholarship

1. learning; knowledge acquired by study; the academic attainments of a scholar.

2. the position of a student who, because of merit, etc., is granted money or other aid to pursue his or her studies.

3. the sum of money or other aid granted to a scholar.

4. a foundation to provide financial assistance to students.

The mere use of the term 'scholarship' by the parties to the arrangement is not determinative of the issue of whether the payment is indeed a scholarship. This has been noted in a number of cases, including Case W107 89 ATC 854; AAT Case 5453 (1989) 20 ATR 4135, where Senior Member Roach stated that:

although the use of the term "scholarship" may have been quite appropriate to describe the study opportunities provided to the applicant, that use of the term cannot be determinative of the question to be resolved before me.

In interpreting the meaning of the words 'scholarship, bursary, educational allowance or educational assistance', the 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 (Hall's Case)).

We have been advised that not all students who apply for the Program are accepted. Selection of the successful students is based on consideration of a number of criteria. It is accepted that you underwent a merit based selection process in order to receive your Program payments.

As it has been accepted that there was a merit based selection process, to conclude whether the payments were made by way of a scholarship, it is necessary to consider whether your education was at least one purpose for which the Program payments were provided.

To do so we must first determine whose purpose is the relevant purpose. As an example, a student who receives a paid work experience placement with an industry sponsor would perceive the purpose of the placement as educational, particularly where the student receives a formal qualification upon completion of the placement. From the perspective of the industry sponsor, however, the main purpose of the placement may be to obtain the services of a high achieving student for the period of the placement.

In Hall's Case, Rath J considered that, in relation to the former section 23(z) of the ITAA 1936, the relevant purpose is that of the provider of the payments rather than the recipient:

The words 'scholarship, bursary or other educational allowance' appear to me to connote an educational purpose in the person who provides the allowance…

It is true that the exemption in sec. 23(z) relates to income in the hands of the scholar, and not to deductibility from income of the benefactor, and that this may be thought to provide a reason for looking at the character of the receipt from the point of view of the purposes of the scholar. Though there may be logic in this approach, I think it is inconsistent with the ordinary understanding of the phrase "scholarship, bursary, or other educational allowance''. In its ordinary meaning that collocation of words connotes a character in the income that attaches to it apart from and irrespective of the use the student makes of the money.

It is considered that the above view is equally applicable to the current scholarship provisions as the terms in question are shared with former section 23(z) of the ITAA 1936.

In this case it is also necessary to examine who in fact provided the payments. Under the agreement, the sponsor agreed to makes a 'donation' to the university of an agreed amount, being made up of the amount that is paid to the student together with an agreed administration fee. Any unspent monies were required to be repaid to the sponsor. Therefore, although the amount paid to the university was termed a 'donation', it was made for a specific purpose, and was required to be repaid to the sponsor if it was not used for that specific purpose.

Accordingly, it is considered that, although the university made the Program payments to the student, they did so as the sponsor's agent or trustee and that it is the sponsor that was the provider of the Program payments. [see Hall's Case; also Case D72 72 ATC 422 for an example of agency]

Whether or not one of the purposes for the sponsor making the Program payments was to assist in your education is arguable given that the payments were only made during the period of your work placement with them. Also, in the event, no matter how unlikely, that you left part way through your work placement, your Program payments would have ceased.

Arguably the Program payments were not made by way of a 'scholarship, bursary, educational allowance or educational assistance' in the ordinary meaning of the terms as the real character of the payments was for the performance of work.

Even if it was determined that one of the purposes for which the Program amounts were paid was an educational purpose, such that the ordinary meaning of 'scholarship' is met, in order for that scholarship to be exempt income it must be provided principally for educational purposes or paragraph 51-35(e) will apply. The application of paragraph 51-35(e) is discussed further below.

The section 51-35 exceptions to Item 2.1A of section 51-10

Section 51-35 excludes the following payments from the section 51-10 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).

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

Nature of the relationship between the student and sponsoring organisation - paragraphs 51-35(c) and (d)

In order to determine whether paragraphs 51-35(c) or (d) apply to exclude the Program payments from exemption it is necessary to determine the nature of the relationship between the payer (the sponsor) and yourself.

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees discusses who is an employee for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 which imposes an obligation on the paying entity to withhold an amount from the relevant payment. Key points made in TR 2005/16 include:

• The relationship between an employer and employee is a contractual one.

• There is no single feature which is determinative of the contractual relationship. The totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee.

• Contractual arrangements often contain a clause that purports to characterise the relationship between the parties. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole - that is, the parties cannot deem the relationship between themselves to be something that is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of the relationship is one of employment the parties cannot alter that fact by merely having the contract state that there is no employment relationship.

The key indicators of whether an individual is an employee or independent contractor, discussed in TR 2005/16, that are relevant to a consideration as to whether the students are employees of the sponsoring organisation under the Program are:

• control - a common law employee will be told not only what work is to be done, but how and where it is to be done

• an employer/employee relationship will include the right to suspend or dismiss the person engaged

• the right to the exclusive services of the person engaged

• provision of benefits such as annual, sick and long service leave and the provision of other benefits prescribed under an award for employees.

An examination of the current arrangement shows that:

• During the period of the work placement, you were under the control of the sponsor, and subject to the same terms and conditions of employment as other sponsor employees.

• Although your agreement with the sponsor stated that the agreement was not intended and would not be taken to constitute an employment relationship, it referred to the placement as 'employment' a number of times. Also, the agreement contains a number of standard employment clauses, for example, with respect to intellectual property rights, confidentiality, conflict of interest, workplace surveillance and privacy.

• Current minimum employment requirements regarding rate of pay and employment conditions had to be met by the sponsor.

• You were entitled to sick leave, annual leave and time in lieu for working overtime.

• The contract may have been terminated by the sponsor for reasons relating to your performance such as failure to attend or inappropriate behaviour in the workplace. Although your application for private ruling contends that this clause was merely a safeguard to cater for extreme circumstances, it nevertheless existed and would be expected in a contract of employment.

• You worked on a day to day basis at the sponsor's premises and contributed to the sponsor's business outcomes.

• The duration of the placement extended beyond a nominal period.

• The sponsor made the final determination of which student would be placed with them.

• The payments provided by the sponsor were limited to the period which you undertook the work placement.

Having regard to the above, it is considered that the relationship between you and the sponsor was more akin to one of employer and employee, rather than education provider and student during the period of the work placement.

Alternatively, if the relationship falls short of being one of employer/employee, it is still considered that the payments you received are payments under a contract that is 'wholly or principally for the labour of the student'. You were being paid to perform work for the sponsor under their direction and control. The amount paid was required to meet minimum employment requirements with respect to rate of pay and you were entitled to sick leave, annual leave and time in lieu for working overtime. Although the work you undertook during the placement may have been influenced by your educational requirements, in reality, you were being paid principally for the work you undertook for the sponsor that is, for your labour rather than for undertaking 'study'.

Therefore, either paragraph 51-35(c) or (d) would exclude the Program payments from exemption under section 51-10.

Are the payments provided principally for educational purposes? - paragraph 51-35(e)

As previously discussed the ordinary meaning of scholarship requires that one of the purposes for which the payments are made must be an educational one, although it need not be the predominant purpose. However, even if one of the purposes of the payments is education, paragraph 51-35(e) requires the payments to be provided principally for educational purposes.

The issue of whose purpose is the relevant purpose in relation to scholarships has been examined further above. With respect to the paragraph 51-35(e) exception it is even clearer that the relevant purpose is that of the scholarship provider rather than the recipient. This is apparent from the words 'provided principally for educational purposes' used in paragraph 51-35(e).

If it were the student's purpose we were intended to examine, the word 'received' would be used. But paragraph 51-35(e) leads us to examine the purposes why the scholarship provider makes the payments to the student.

Also as discussed previously, although the university made the Program payments to you, they were doing so as agent or trustee of the sponsor and therefore the sponsor was the provider of the Program payments.

The following facts are considered relevant in determining whether the sponsor provided the Progam payments principally for educational purposes:

• The sponsor provided funds for the Program on the condition that a student that they chose would complete a work placement with them on a full-time basis for approximately one year. If in the event, no matter how unlikely, the student did not complete the work placement and a suitable replacement was not found, the university was required to repay the sponsor the unused portion of the funds.

• You were shortlisted using the sponsor's selection criteria and the sponsor made the final selection for you to complete the work placement with them.

• The sponsor believed that you would make a significant contribution and add considerable value to their business. The sponsor was correct in this belief as the documents you have provided describing the work you undertook there show that you did in fact make a significant contribution to their business.

• The university has marketed its Program to potential sponsoring organisations as a means to assess future employees, fill temporary vacancies and to save on costs usually associated with employees such as HR administration, workcover, and superannuation.

• Indicators that the Program payments were made under a contract that was 'wholly or principally for the labour of the student' which were discussed previously, such as a minimum rate of pay and employment conditions, are also relevant in considering the principal purpose of the payments. This is because a scholarship which requires the provision of the student's labour is unlikely to be provided principally for educational purposes.

In your application for private ruling, it is claimed that the Program payments were provided principally for educational purposes. However, an objective assessment of the purpose for which the sponsor provided the Program payments raises the following questions. Why is it that the payments were only made when you were on the sponsor's premises? Why does the sponsor not provide the 'scholarship' when you are undertaking formal education at the university? Why should the sponsor distinguish between the two if it truly has your education as its principal object?

It is considered that the answer is that the sponsor has a commercial object as its principal purpose and any benevolent object of contributing to your education is merely ancillary.

The sponsor's commercial object is to obtain the services of the student they selected, and also possibly for the opportunity to 'assess' the student's suitability for an offer of future employment.

As it is not considered that the Program payments were provided principally for educational purposes, paragraph 51-35(e) will exclude the Program payments from exemption if it is not otherwise excluded from exemption by the operation of either paragraph 51-35(c) or (d).

Summary

It is accepted that you received some educational benefit from undertaking the work placement and that the work placement was integrated into your university course. However, these matters in themselves do not result in the Program payments you received while undertaking the work placement being a scholarship that is exempt from tax. The Program payments must still meet the requirements of section 51-10 and not fall under any of the exclusions in section 51-35.

There is doubt as to whether during your full-time work placement at the sponsor's premises you were a full-time student or a student at a school, college or university. Also, it is questionable whether the Program payments are a 'scholarship' under the ordinary meaning of the term.

However, even if those three requirements are met, it is considered that the Program payments would be excluded from exemption by either paragraph 51-35(c), (d) or (e).

Therefore, the Program payments are not exempt from income tax and are assessable income.