Edited version of private advice

Authorisation Number: 1012682578249

Ruling

Subject: Scholarships

Question

Is your scholarship exempt income under section 51-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You receive the scholarship, which is provided to you by Sponsor X and your university. It is a requirement you maintain a full time enrolment with the university in the specified current degree.

You receive a cash payment each semester to assist with costs associated with studying for the remaining expected duration of your degree for which the scholarship is offered (up to three years maximum).

The cash payment is made in exchange for six months of unpaid vacation work with the sponsor over a three year period (three months at the end of the second and third years of study).

Under the work experience agreement, the sponsor states you are not, and will not at any time during your work experience placement be, an employee, contractor or agent of the sponsor.

You will also not receive any financial remuneration or other form of benefit from the sponsor in respect to any activities you engage in or any work product you produce during your work experience placement.

All intellectual property rights in any work product created by you in the course of your work experience placement will immediately on creation vest in and be owned by the sponsor.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) section 6-5

Income Tax Assessment Act 1997 (ITAA 1997) section 51-10

Income Tax Assessment Act 1997 (ITAA 1997) section 51-35

Reasons for decision

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an amount is included as assessable income if it is income according to ordinary concepts (ordinary income). However, if an amount is exempt, it is not included in the assessable income of a taxpayer

Section 51-10 of the ITAA 1997 provides, subject to some exceptions listed in section 51-35 of that Act, that a scholarship, bursary, educational allowance or educational assistance payment is exempt from income tax if it is paid to a full-time student at a school, college or university.

For the scholarship to be exempt from income tax the taxpayer must be a full time student at a school, college or university, they must be in receipt of a scholarship that is provided principally for educational purposes and there must be no condition that the taxpayer 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, the scholarship you receive provides a payment relevant to each semester of full time study. In exchange for these payments, you are required to complete six months of unpaid work with the sponsor, as per the scholarship terms and conditions. While there is no expectation or requirement that you become an employee of the company and at no time during your work experience does the sponsor consider you an employee, your scholarship is contingent on the undertaking of the unpaid work.

Simply because an express characterisation of your employment status in your written agreement excludes you from being considered an employee, does not determine the matter.

A payment made in exchange for unpaid work suggests the nature of the scholarship is not primarily provided for education. Section 51-35(d) of the ITAA 1997 provides where a payment was wholly or principally for the labour of a student, it will no longer be considered an exempt amount.

A service is considered rendered if you are required under the terms of the scholarship to undertake activities which may be considered to be of use, help or benefit for the provider. For example, assigning to the scholarship provider property rights in respect of the products of intellectual activity undertaken by the scholar pursuant to the scholarship is considered beneficial to the provider.

In your case, as per the terms and conditions of your work experience, all intellectual property rights in any work product you create in the course of your placement will belong to the sponsor. You a required to complete three months unpaid work at the end of the second and third years of your study in order to satisfy the compulsory six month period. During this time, it is expected that you could be of significant benefit to the company, through the work that you are undertaking.

It is upon these requirements that section 51-35(e) of the ITAA 1997 is considered applicable to your situation. Given your situation described above, whether the scholarship was provided principally for educational purposes is unlikely. Although there may have been an educational benefit, from the perspective of the sponsor, the primary purpose of the placement was more likely to obtain the services of a high achieving student, like yourself, for the period of the placement.

It cannot be said that your scholarship has been provided principally for educational purposes, or that you were not required to work or provide labour for the sponsor.

Therefore, your scholarship is not exempt from income tax under item 2.1A of the table in section 51-10 of the ITAA 1997. Accordingly, your scholarship should be declared as taxable income, under section 6-5 of the ITAA 1997.