Edited version of your written advice

Authorisation Number: 1013069172693

Date of advice: 9 August 2016

Ruling

Subject: Scholarships

Questions and Answers

1. Is the University required to withhold tax from the fortnightly stipend payments made by them to students enrolled in the program under arrangement one and two as described in this ruling?

No

2. Can the University withhold tax from the fortnightly stipend payments made by them to students enrolled in the program under arrangement three as described in this ruling?

Yes

3. Is the University required to withhold tax from the project support funds paid to students enrolled in any of the three arrangements described in the ruling?

No

This ruling applies for the following period

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 commenced on

1 July 2015

Relevant facts

The university offers scholarship to full-time PhD students undertaking the program.

Under the program the university seeks funding and research projects that are necessary to support the students to complete their studies. The industry sponsor (sponsor) provides financial support to assist the students to achieve these outcomes.

The scholarship is a specific amount per annum (indexed annually by CPI) which is provided by the sponsor for up to three and a half years. The scholarship funds are paid directly to the university so the student does not receive any program payments directly from the sponsor.

The university pays the amount to students as a living allowance (stipend) on a fortnightly basis (scholarship payments).

The sponsor also provides financial support (project support funds) for project costs e.g. to purchase equipment for the project. This money will be held by the university and made available to the student for those expenses. The project support funds will only be reimbursed to the student on production of a receipt.

There is no agreement between the student and the sponsor as the university considers that the most appropriate way to facilitate the relationship is to have an agreement between the university and the student and the university and the sponsor.

The program is advertised publicly by the university (using the same promotion used for general scholarships). In general terms:

• the advert contains a description of the wider research area so that applicants can apply against relevant criteria

• the criteria cover the students' academic achievements and interpersonal skills and based on the applicants' responses to that criteria, the university identifies its preferred student

• the student is then presented to the sponsor and their feedback is sought but the university has the sole discretion in relation to the student put forward (however, the sponsor is not bound to support the student that the university nominates)

• the advert refers to a wide research area so there is a range of challenging projects available within that research area

• potential students are interviewed in order to assist in defining a specific project

• a potential research area is identified by the university in consultation with a potential sponsor

• the faculty and the student define the specific project to ensure that it addresses a research topic of sufficient academic merit

• as a courtesy, the university shares the nature of the research project with a potential sponsor, and

• the university considers the sponsor's comments regarding the research project but it is not obliged to adjust the topic or the key research questions to be addressed.

The program is offered under three different arrangements.

Arrangement one

The terms of arrangement one (as outlined in the Program Agreement Term Sheet) include:

Recitals

The university seeks funding and research projects that would be necessary to support higher degree research (HDR) students complete their studies.

The sponsor would like to assist in achieving these educational outcomes by providing financial support.

Contributions by the sponsor

The sponsor will provide an amount indexed annually by the CPI, for up to three and half years to be paid by the university to the student as a living allowance (stipend).

The sponsor may also provide other financial support provide (sic), e.g. project operating funds, funds to purchase equipment, travel which will be held in a the university account and made available to the student to support those expenses (project support funds).

The university will invoice the sponsor for payments, with the first payment to be made on signing of the agreement and periodically as agreed thereafter.

The sponsor may also provide in-kind support e.g. facilities, supervision, equipment.

The student will not receive any payment directly by the sponsor.

HDR program and eligibility

The project support funds and stipend together form the HDR support program.

Only students who successfully enrol in a PhD on a full time basis will be eligible to receive an HDR support program opportunity.

The university will advertise the PhD project to a pool of applicants who will be selected on academic merit by the university only.

Students may be an employee of the sponsor or the university, but it is not a condition of the program agreement that they remain in the sponsor or the university' employ.

It is not a condition of the program agreement that the student becomes an employee of the sponsor.

Supervision

The university requires that the student identify, at the time of enrolment, their academic supervisors ("supervisors").

The university policy requires that supervisors hold either an honorary title awarded by the university or are employees of the university.

Sponsor's staff may apply for an honorary title but all applications will be assessed on normal academic criteria and the award of honorary titles are not guaranteed.

The student and supervisors must meet (by any means) at least every three months to discuss the progress of the student's PhD project.

Project

At the time of enrolment, all applicants for PhD enrolment must nominate the project they will undertake for their PhD studies (PhD project).

The PhD project will be chosen by the university and the student but must be in a particular field of research.

The university will not approve a PhD project unless it is satisfied that it includes research that is of an academic standard and complexity suitable for a PhD student.

Intellectual property

Intellectual property created by the student will be owned by the student.

Publication

Sponsor's funding support will be acknowledged in every publication of the results of the project.

Sponsor will be provided with a copy of all publications that reference it.

Repayment of project support funds

The university shall repay any project support funds that have not been expended upon the completion of the project.

Termination

The university may terminate the agreement at any time if the student ceases their enrolment.

The university will repay any part of the stipend that has not been paid to a student.

Arrangement two

Arrangement two differs from arrangement one as follows:

Recitals

The university seeks funding and research projects that would be necessary to support the Students to complete their studies.

Sponsor would like to assist in achieving these educational outcomes through jointly (with the university) identifying research projects that are broadly aligned with the university, the Students' and Sponsor's business interests.

HDR Program and Eligibility

The university will advertise the PhD Project to a pool of applicants and select a preferred candidate(s) based on academic merit. The Student selected must be approved by the Sponsor, and the Sponsor does not have to approve any Student for the award of the Program.

Intellectual Property

The university will own all intellectual property created by the Student in the course of the PhD Project.

The university grants the student a non-exclusive and perpetual research licence of the intellectual property created in the course of the PhD Project, and Student may retain ownership of copyright in their thesis (only), subject to the publication restrictions below.

For [3] months following the completion of the PhD Project, the Sponsor has the exclusive option to negotiate with the university to secure rights to the intellectual property created in the course of the PhD Project, including but not limited to an assignment or an exclusive or a non-exclusive licence to the intellectual property from the university, at arms-length and on commercial terms licence of.

The university will share commercial proceeds it receives from the Sponsor as a result of the exploitation of the intellectual property rights with the Student in accordance with the terms of the university Intellectual Property Ordinance [which essentially says that the Student will receive 50% of income derived by the university after costs].

The university must ensure that an agreement is put in place between the university and the Student to enable it to comply with its intellectual property obligations to the Sponsor.

Publication

The Student may only publish the results of the PhD Project with the permission of the Sponsor. The Sponsor may only withhold their permission for a period of up to 18 months after the completion of the Project.

Sponsor's funding support will be acknowledged in every publication of the results of the PhD Project.

Arrangement three

Arrangement three differs from arrangement one as follows:

HDR Program and Eligibility

The university will suggest a suitable Student to the Sponsor, and will provide the Sponsor with the Student's CV. The university will assess whether or not the Student is academically qualified and capable of undertaking the PhD Project based on academic merit. The university does not need to advertise the HDR Support Program. The Sponsor does not have to approve any Student for the HDR Support Program.

Placement

The Student will be required to undertake up to a 12 month placement with the Sponsor.

The Student will only work on their PhD Project during the placement.

The Sponsor's staff will supervise the Student's conduct of the PhD Project while on the placement.

Supervisors will continue to meet with the Student (by any means) at least every three months to discuss academic progress.

The Student will be responsible for their own costs of attending Sponsor's premises unless the Project Support Funds (as stated above) include an amount for travel costs.

The Student might be required to sign a confidentiality agreement with the Sponsor as a condition of attending Sponsor's premises and will comply with all reasonable instructions of the Sponsor while at its premises.

Intellectual Property

Sponsor will exclusively own all intellectual property created by the Student in the course of the PhD Project.

Unless otherwise agreed the Sponsor is not obligated to pay the university or the Student any share of commercialisation proceeds it obtains from the intellectual property assigned to it.

The Student may retain ownership of copyright in their thesis (only), subject to the publication restrictions below.

The university must ensure that an agreement is put in place between the university and the Student to enable it to comply with its intellectual property obligations to the Sponsor.

Publication

The Student may only publish the results of the PhD Project with the permission of the Sponsor. The Sponsor may only withhold their permission for a period of up to 18 months after the completion of the PhD Project.

Sponsor's funding support will be acknowledged in every publication of the results of the PhD Project.

When on a placement as part of the program:

• Students are expected to observe the workplace health and safety policies of the Sponsor

• Students may also be required to be bound by confidentiality, privacy and conflict of interest policies depending on the type of entity in which they are placed, and

• The university ensures that the Student is covered by a policy of personal accident insurance on the assumption that the Sponsor's insurance would not apply.

On successful completion of the program the student obtains their PhD.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 51-10

Tax Administration Act 1953 Division 12 of Part 2-5 of Schedule 1

Reasons for decision

Pay as you go (PAYG) withholding requirements

Division 12 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) governs the PAYG system and outlines when an entity must withhold amounts from payments made to people.

When we look at PAYG withholding obligations, we firstly need to determine whether tax is payable on the payments. We therefore need to determine firstly if the scholarship payments (the stipend payment and program support funds) are assessable income.

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) provides that an amount is included in your assessable income if it is income according to ordinary concepts (i.e. 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.

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

However, the project support funds are not assessable as ordinary income under section 6-5 as they are not periodical receipts that are relied on by the student. The project support funds are direct reimbursements of actual expenses incurred by the student as part of the education course. They are not ordinary income or statutory income under section 15-2 of the ITAA97.

Exempt income

Subsection 6-20(1) provides that an amount of ordinary income or statutory 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 scholarship 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 scholarship holders full-time students at a school, college or university?

Students undertaking a full-time course at university may undertake training or study at an external site. However there must be a sufficient connection between any study undertaken at external sites and the related university course. Where a student engages in external work or study which only partially relates to a university course, it may be the case that the student is not considered to be studying at the university full-time.

Having regard to these circumstances, it is accepted that students undertaking the program satisfy the condition of being a full-time university student. However if at any point the student changes to a status that is not full time, this condition will not be satisfied.

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, contains the following definitions:

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.

scholar

1.a learned or erudite person.

2. a student; pupil.

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

student

1. someone who is engaged in a course of study and instruction, as at a college, university, or secondary school.

2. someone who studies a subject systematically or in detail.

Paragraphs 34 to 48 of Taxation Ruling TR 93/39 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; and

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

To be awarded a scholarship, applicants 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 program and the purpose of this program is to enable the student to complete their PhD project. As such, it is accepted that the scholarship has the requisite educational purpose.

Accordingly, it is accepted that the stipend payments made under the program is 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 assistance for secondary education or in connection with education of isolated children: paragraph 51-35(a);

• payments by the Commonwealth for education or training: paragraph 51-35(b);

• 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);

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

• education entry payments under Part 2.13A of the Social Security Act 1991: paragraph 51-35(f).

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.

In Federal Commissioner of Taxation v Ranson, the Federal Court took the view that the words 'upon condition that' did 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.

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

The scholarship 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.

Nature of the relationship between the student and sponsor organisation

In order to determine whether paragraph 51-35(d) applies to exclude the scholarship payments from exemption it is necessary to determine the nature of the relationship between the payer (the sponsor) and the recipient (the student).

Under the program, the sponsor makes a payment of the agreed amount to the university. Any unspent monies must be repaid to the sponsor. Any amounts that not used for the purpose specified by the sponsor must also be repaid.

Accordingly, although the university makes the payments to the student, they are doing so as agent or trustee of the sponsor and it is the sponsor that is the payer of the scholarship payments [see Hall's case; also Case D72 72 ATC 422 for an example of agency]. Therefore, for the purposes of paragraph 51-35(d) it is the relationship between the student and the sponsor that needs to be considered.

Arrangement one and two

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.

Under arrangement one and two, the student and the university respectively own the intellectual property that is produced during the program. As such, it is accepted that under these arrangements, any benefits to the sponsor are an incidental product of the program. Therefore there is no contract wholly or principally for the labour of the student.

Accordingly, the scholarship payments are not excluded from exemption under paragraph 51-35(d).

Arrangement three

Under arrangement three, the sponsor exclusively owns the intellectual property that is produced during the program. While the benefits to the sponsor under arrangement three are not an incidental product of the program, it is accepted that the relationship between the student and the sponsor is not wholly or principally for the labour of the student.

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

Are scholarships provided principally for educational purposes?

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.

In Federal Commissioner of Taxation v. Hall (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 scholarship payer. (Refer to paragraphs 65 to 67 for a discussion in relation to who is the payer).

The scholarship payments are paid to a student enrolled in the program. The scholarship payments are made to assist the student to undertake their PhD. Therefore, it is accepted that the payments have an educational purpose.

It is accepted that under arrangements one and two, the scholarship payments are provided principally for education purposes and accordingly paragraph 51-35(e) will not exclude these payments from exemption.

However, it is not accepted that the scholarship payments under arrangement three are provided principally for educational purposes. The university is paying the student fortnightly from funds provided by the sponsor who is obtaining the intellectual property that the student produces during the program. During the time the student participates in the program, it is expected that the results could be of significant benefit to the sponsor, through the work the student is undertaking. Although the work undertaken by the student may be influenced by the educational requirements of the student, the primary purpose of the sponsor is more likely to obtain the services of a high achieving student. In reality, the student is being paid for the resulting intellectual property rather than for undertaking 'study'.

Therefore, it is considered that the sponsor is providing the funding to the university for the scholarship payments to be paid to the student in order to obtain the intellectual property of a student, rather than a more benevolent purpose of assisting the student's education.

Accordingly, paragraph 51-35(e) will exclude the scholarship payments made under arrangement three from exemption.

PAYG Withholding

As the scholarship stipend in arrangements one and two and the project support funds under each of the three arrangements are not assessable there is no requirement for the university to withhold from these payments.

However, the university can withhold from stipend payments made to a student under the third arrangement as these payments are assessable. There is nothing in taxation law that prevents this. The Commissioner supports the university in their decision to withhold amounts according to the appropriate tax tables as it good administrative practice, supports the recipients with their tax affairs and encourages participation in the tax system.

Where amounts are withheld, the university will issue a payment summary to these students at the end of the year.