Edited version of your written advice

Authorisation Number: 1012994417024

Date of advice: 18 April 2016

Ruling

Subject: Income tax - PAYG withholding - University scholarship

Question 1

Is X University required to withhold PAYG Withholding from the fortnightly stipend paid to students who are recipients of the Y Scholarship?

Answer 1

No.

Question 2

Is X University required to withhold PAYG Withholding from the re-imbursed expenses amount paid to students who are recipients of the Y scholarship?

Answer 2

No.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

X University awards the scholarship to full time students at X University who:

• are enrolled in a certain degree at X University as part of the scholarship program; and

• undertake training at X University.

X University pays recipients of the scholarship a:

• fortnightly stipend payment; and

• a re-imbursement amount that is in the nature of study support over the duration of the scholarship program. A student can also apply for additional amounts to cover certain education expenses.

X University offers scholarships to full time students undertaking the scholarship program.

The objective of the scholarship program is of an educational nature.

The scholarship program allows the student to gain research experience and produce publications and a thesis which forms part of the scholarly requirements of the scholarship program.

Applications for participation in the scholarship program and scholarship are assessed based on merit. A student is eligible to apply for the program if the student;

• is enrolled as a full time student at X University;

• holds a degree from a recognised university;

• is eligible to be work in a certain Australian state;

• has postgraduate experience; and

• is an Australian citizen or permanent resident or a New Zealand citizen.

Selection for the scholarship program occurs through a competitive process. Applicants outnumber positions. All applicants are reviewed by a selection committee where interviews are conducted and references are sought. The most suitable candidate is then recommended for further consideration and acceptance for the eligibility of the stipend and re-imbursed expenses amount.

All successful applicants to the scholarship program are eligible and in receipt of the scholarship. There are no full fee-paying students completing the scholarship program, all places are taken by recipients of the scholarship.

Scholarship recipients are not required to pay course fees.

The majority of the student's time in the scholarship program is spent learning under the supervision of experienced individuals in the area of study. The supervision is a requirement of the scholarship program.

The students are required to participate in instruction, tutorials and laboratories for undergraduate students by assisting as teaching aides and at times presenting to the class. There is always a specialist supervising the students in such classes.

Each student is required to have a University appointed committee so that the student has frequent interaction or with which the student is engaged with research. The purpose of the committee is to provide advice, direction, support and feedback to the student.

Continuation in the scholarship program is dependent on satisfactory progress and evaluations and completion within the time period.

There is no expectation or requirement that scholarship students will become employees of X University.

The full time scholarship carries a scholarship stipend amount; it is paid to the student on a fortnightly basis.

The student is also eligible to receive a re-imbursed expenses amount that is in the nature of study support during the scholarship program. The amount can be used for the purpose of travel (externships, conferences) and post-graduate research and must be first approved by the student's supervisor.

The re-imbursed expenses amount is paid via a claim for re-imbursement by the student that must be accompanied by receipts and must be received during the applicable financial year that the expense was incurred. Additional study support can also be applied for to spend on research support and conference expenses; this study support requires various levels of pre-approval and supporting documentation.

The terms and conditions of the program are set out in various X University documents.

The scholarship program has a committee that is responsible for ensuring the relevant policies and responsibilities attached to the scholarship program are followed.

Relevant legislative provisions

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

section 6-10 of the ITAA 1997;

section 15-2 of the ITAA 1997;

section 51-10 of the ITAA 1997; and

Part 2-5 of schedule 1 of the Taxation Administration Act 1953

section 12-35 of schedule 1 of the Taxation Administration Act 1953

section 12-40 of schedule 1 of the Taxation Administration Act 1953

sub-section 12-1(1) of schedule 1 of the Taxation Administration Act 1953

sub-section 12-1(A) of schedule 1 of the Taxation Administration Act 1953

Reasons for decision

Question 1

Summary

The fortnightly stipend payments made by X University, to students undertaking the scholarship program is ordinary income but is excluded from the student's assessable income because it is exempt income, therefore you do not need to withhold PAYG withholding from these payments.

Question 2

Summary

The re-imbursed expenses amount made by X University to students undertaking the scholarship program do not form part of the student's assessable income because it is neither ordinary income nor statutory income, therefore you do not need to withhold PAYG withholding from these payments.

Question 1 & 2

Detailed reasoning

Pay as you go (PAYG) withholding requirements

Part 2-5 of Schedule 1 (Sch 1) of the Taxation Administration Act 1953 (TAA) covers Pay As You Go (PAYG) withholding obligations.

Section 12-35 of Sch 1 of the TAA states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

However, subsection 12-1(1) of Sch 1 of the TAA provides that an entity need not withhold an amount under section 12-35 of Sch 1 of the TAA if the payment is exempt income. Subsection 12-1(1A) of Sch 1 of the TAA provides that an entity need not withhold an amount under section 12-35 of Sch 1 of the TAA if the payment is non-assessable non-exempt income.

We therefore need to determine firstly if the scholarship payments (the stipend payment and the re-imbursed expenses amount) are assessable income because they are either ordinary income or statutory income and then if the answer to that question is yes, determine if the payments are exempt income or non-assessable non-exempt income in the hands of the scholarship students.

If the scholarship payments are not considered ordinary or statutory income or are considered exempt income or non-assessable non-exempt income of the students then X University will not be required to withhold an amount under the PAYG withholding system.

Assessable Income

A payment or other benefit received by a taxpayer is assessable income if it is:

• income in the ordinary sense of the word (ordinary income); or

• an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Ordinary income

Subsection 6-5(1) of the ITAA 1997 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, 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. Amounts paid in substitution for salary or wages foregone or lost may also be ordinary income.

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered and the motive of the payer may be relevant to this consideration.

Fortnightly stipend payments received by a student are considered to be ordinary income, being periodical receipts that are expected and relied upon by the student.

The re-imbursed expenses amount is a reimbursement of the student's actual expenses and not an allowance, as explained by Taxation Ruling TR 92/15 which deals with the distinction between an allowance and a reimbursement for income tax and fringe benefits tax purposes:

A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider.

It is considered that the re-imbursed expenses amount reimbursed to the students to attend conferences or training sessions integral to the scholarship program is not assessable as ordinary income as it does not satisfy the criteria for ordinary income. The payments are a direct reimbursement of expenses incurred as part of the education course which are not the product of any employment or services rendered and not ordinary income in the hands of the student.

Statutory income

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included as assessable income by another provision.

Section 10-5 ITAA 1997 lists provisions about statutory income and included in this list is section 15-2 of the ITAA 1997.

Section 15-2 of the ITAA 1997 includes in a taxpayer's assessable income the value of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to the taxpayer 'in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by' the taxpayer.

The re-imbursed expenses amount is not provided to the student as an employee. Nor is it provided 'in respect of, or for or in relation directly or indirectly to' any services rendered by the student, as there is no element of reward in the re-imbursed expenses amount for any services the student might provide. The re-imbursed expenses amount is paid solely to support the student's professional education and development in matters integral to the scholarship program. Any amounts the student receives in reimbursement of costs incurred in attending conferences and training sessions are therefore not assessable income under section 15-2 of the ITAA 1997.

Exempt income

Subsection 6-20(1) or the ITAA 1997 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 of the ITAA 1997 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 of the ITAA 1997 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 of the ITAA 1997.

As the fortnightly stipend payments are ordinary income, it must be established whether or not they are exempt income under Division 51 of the ITAA 1997. This requires a consideration of these three conditions.

The re-imbursed expenses amount is neither ordinary nor statutory income and it is unnecessary to consider whether these payments are exempt.

Are scholarship holders full-time students at a school, college or university?

In these circumstances, it is accepted that the Scholarship students undertaking the full-time scholarship program at X 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:

a) the selection of recipients based on merit or some other rational criterion; and

b) the education of the recipient is at least one purpose for which the scholarship is provided.

To be awarded a scholarship, students have to undertake a competitive selection process which involves them being assessed against a range of criteria such as their academic achievements and interpersonal skills. As such, it is accepted that selection for the scholarship is merit based.

In Chesterman v. Federal Commissioner of Taxation Isaacs J said that for purposes to be educational they must provide for the giving or imparting of instruction.

The scholarship is paid to a student enrolled in the scholarship program and the purpose of this program is to enable further specific training. It is accepted that the scholarship has the requisite educational purpose.

Accordingly, it is accepted that payments made under the scholarship 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 payments made under the scholarship 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. 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 scholarship program, students are required to undertake various evaluations that are supervised. Students are also required to participate in instruction, tutorials and laboratories for undergraduate students by assisting as teaching aides and at times presenting to the class. There is always a resident supervising in such classes. This work is an integral part of the scholarship program.

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

The payments under the program 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.

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 scholarship work undertaken by the student is a requirement of the scholarship program. The terms of the scholarship put the student under no obligation (whether or not legally binding) to enter into a contract wholly or principally for the student's labour in the future, or to do so if required.

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

Are the scholarships provided principally for educational purposes?

The scholarships are awarded to a student to enable them to complete the scholarship program at X University.

It is accepted that in providing the scholarships X University is doing so principally for educational purposes. The scholarship payments are therefore not excluded from exemption by paragraph 51-35(e).

Conclusion

Therefore as the fortnightly stipend payment although considered ordinary income is exempt income in the hands of the students receiving it, X University is not required to withhold any PAYG withholding under subsection 12-1(1) of Schedule 1 to the TAA, when paying it.