Edited version of your written advice

Authorisation Number: 1051358923095

Date of advice: 11 April 2018

Ruling

Subject: Scholarship

Question 1

Is the University required to withhold tax from the contribution instalments made by them to Participants enrolled in the Program?

Answer

No

Question 2

Is the University required to withhold tax from the expense reimbursements paid to Participants enrolled in the Program?

Answer

No

This ruling applies for the following periods

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2020 to 30 June 2022

The scheme commences on

1 July 2017

Relevant facts and circumstances

The University has established the Program with the aim to develop leaders with the skills and capability to lead social change.

The Program will run for a number of years. A number of participants will undertake the Program each year.

Eligibility to receive the scholarship is restricted to Participants of the Program. The Program must be completed full-time, within the outlined 12 month timeframe.

Participants who successfully complete the Program will be awarded a postgraduate qualification from the University. That qualification will take the form of either a postgraduate certificate or, a Master’s Degree.

Funding for the Program has been provided by a private foundation.. In addition, the Australian Government will contribute funding, with further financial support coming from other educational institutions.

While the University has ultimate responsibility for administering the Program, various partner organisations will assist the University to deliver the Program. Partner Organisations may assist with Participant selection, development and delivery of the Program curriculum, and supporting Participants by providing faculty, facilities and resources.

There is no obligation or condition under the Program, or the terms of the payment of the Contributions and any Expenses, for Participants the render any service to the University, or any party providing funding for the Program, either while studying or after completion of the course. The Participants have no right or expectation of future employment with the University, or any party providing funding for the Program.

Participant selection

The University will have primary responsibility for selecting Participants for the Program each year. Selection criteria (to determine whether a particular applicant should be a Participant) will be published as part of the application and selection process. social cThe selection criteria will not be applied in a way that favours an applicant who happens to have or to establish an employment relationship with any of the parties to the arrangements, including Partner Organisation.

Program outline

Participants in the Program will be enrolled in a 12-month postgraduate education course, which will have two components: Modules and Development of the Proposal.

Course modules

Participants will be required to complete a series of course modules (each a Module) designed to expose Participants to a variety of topics, contexts and locations relevant to leadership and Master’s Degree.

The Modules will be taught in a variety of different settings in New Zealand and Australia. Settings will include the University's campus and some of the campuses of the Partner Organisations. Fieldwork will also be conducted at various geographical settings across Australia. In some cases, Participants may also conduct fieldwork in other countries.

Participants will be expected to physically attend each of the Modules.

Modules will have different durations depending on the topics covered. The duration of the Modules will range from a few days to several weeks. Attendance at the Modules is a full-time commitment, so Participants will not have time to undertake any full-time work while attending the Modules.

Participants will spend no less than 70 days attending the Modules.

Development of the Proposal

A fundamental part of the Program is the expectation that each Participant will research and develop the Proposal they provided at the time they applied to participate in the Program. While they attend the Program, Participants will be expected to fully develop and refine their Proposal to the necessary standard to allow a Master's Degree to be conferred, with assistance from the University, its Partner Organisations and certain other stakeholders and interested parties.

The University expects that the amount of time Participants will spend researching and developing their Proposals will vary between Proposals. The time will vary because no two Proposals will be the same and the tasks involved in completing each Proposal could be quite different. Under the Australian Qualifications Framework, a Master’s Degree (Research) qualification must be designed so that at least two-thirds of the Program is dedicated to undertaking research. The development of the Proposal will satisfy this research requirement.

At the end of the Program each Participant will be invited to present a final written Proposal at an event that will feature representatives from government, business, community, academic and philanthropic sectors. Following that presentation, the University may publish the final Proposal.

A specific faculty member (the Mentor) at the University or from a Partner Organisation will be appointed to mentor each Participant in relation to Program requirements, including the development of Proposals. There will be no formal requirements regarding contact time, given that the circumstances of each Participant and their Proposal will be different. However, the University expects Participants to be in regular contact with Mentors.

Each Participant will also have a personal coach who will work with the Participant on an individual basis to support their professional and personal development. Coaches will be selected to match each Participant and will be independent of the University.

Qualifications

All Participants who successfully complete the Program will obtain a postgraduate qualification from the University.

The University expects each Participant to approach the Program on the basis that they are working towards a Masters level qualification and that the amount of work that each Participant should put into the Program will reflect the intended standard of the qualification.

Provided that a Participant submits a final Proposal for assessment at the end of the Program, the University expects that Participants will obtain a Master’s Degree. However, if a Participant does not submit a Proposal that meets the necessary standards to allow a Master’s degree to be conferred, the Participant will instead be awarded a Graduate Certificate.

Contributions to Participants

The University has established the Trust, from which a payment of A$X (the Contribution) will be made to each Participant.

The Contribution will be paid in instalments during the Program and Participants will receive instalments on the same dates and in the same amounts. Instalment payments will be spread over the term of the Program, with instalments being paid both during the Module section of the Program and after this while the Participant is working on his or her Proposal.

The payment of each instalment to a Participant will be dependent on the Participant's progress in the Program. If a Participant withdraws from the Program or the University determines that a particular Participant is no longer actively participating in the Program, they will forfeit any right to instalments that they have not already received.

The purpose of the Contribution is to minimise a Participant's financial barriers to undertaking the Program. The Contribution is intended to help Participants cover their on-going living costs and the costs associated with completing the Program and developing their social change Proposal (such as research materials).

Because of the time commitment involved and the level of the qualification sought, the University expects that many Participants will be unable to undertake full-time employment while they are participating in the Program. In all cases, full-time employment will not be possible when Participants are attending the Modules.

The funding for the Contribution will come from the Trust, which will transfer the necessary funding to a bank account controlled by the University, to be disbursed to the Participants.

As the Contribution will be paid in instalments as a Participant progresses through the Program, it is unlikely a Participant will be required to repay any of the instalments previously received, even if the Participant does not successfully complete the Program, except in very exceptional circumstances (e.g. in instances of fraud). However, withdrawal from the Program will mean that a Participant will cease to be entitled to any further instalments that they would have otherwise been entitled to receive if they had successfully continued in the Program.

Expenses

In addition to providing the Contribution, the University will also agree to meet certain additional costs that might otherwise be a barrier to a Participant's participation in the Program. These costs may include:

a. costs associated with travelling to attend the Modules;

b. the cost of a Participant's accommodation during the Modules; and

c. costs associated with a Participant's special needs that may affect their ability to participate in the Program (for example, if a Participant has a disability, the University will cover the cost of additional resources that that Participant requires, such as a reader/writer or signer (for the hearing impaired). This is to ensure that the Participant's disability does not impede their successful completion of the Program), (the Expenses).

It is anticipated that, like the Contribution, amounts used to make payments for the Expenses will generally come from the Trust (with the University making disbursements of the Expenses funding to third parties (or Participants, as explained below) as agent for the Trust). However, it is also possible that in some circumstances the University may fund the Expenses directly itself as a part of the Program (i.e. as opposed to the Expenses funding being sourced from the Trust).

The University will generally pay for any Expenses making payments to the third party suppliers of the goods and services. It is possible that in rare circumstances a Participant may pay Expense associated with the Program personally. In those circumstances, the University will generally reimburse the Participant for the cost of the Expenses that they have incurred.

Intellectual Property

Each Participant retains ownership of any intellectual property developed by the Participants during the course of participating in the Program.

Each Participant grants to the University a perpetual, non-exclusive, worldwide licence to use, reproduce, communicate and adapt the fellowship Intellectual Property for non-commercial research, teaching and other academic purposes, as well as any purposes associated with the promotion of the Program.

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 Contribution Instalments received by a Participant are considered to be ordinary income, being periodical receipts that are expected and relied upon by the Participant.

However, the Expense Reimbursements paid to the Participant are not assessable as ordinary income under section 6-5 as they are not periodical receipts that are relied on by the Participant. They are direct reimbursements of actual expenses incurred by the Participant 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 Participant engages in external work or study which only partially relates to a university course, it may be the case that the Participant is not considered to be studying the University full-time.

Having regard to these circumstances, it is accepted that Participants undertaking the program satisfy the condition of being a full-time Participant. However if at any point the Participant 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 Participant enrolled in the program and the purpose of this program is to enable the Participant to complete their studies. 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 Participant under no obligation (whether or not legally binding) to become an employee the University or funding provider 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.

There is no obligation or condition under the Program, or the terms of the payment of the Contributions and any Expenses, for Participants the render any service to the University, or any party providing funding for the Program, either while studying or after completion of the course. The Participants have no right or expectation of future employment with the University, or any party providing funding for the Program.

Accordingly, 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.

The Participant will grant to the University a perpetual, non-exclusive, worldwide licence to use, reproduce, communicate and adapt any intellectual property for non-commercial research, teaching and other academic purposes, as well as any purposes associated with the promotion of the Program. That licence also includes a right to sub-licence. However, while the licence is granted to the university, it is not considered that this disrupt the educational purpose of the scholarship.

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

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

PAYG Withholding

As the Contribution Instalments and Expense Reimbursements are not assessable there is no requirement for the University to withhold from these payments.