Edited version of private advice

Authorisation Number: 1051953010015

Date of advice: 25 February 2022

Ruling

Subject: Assessable income - scholarship

Question

Are the payments received by the Taxpayer under the University's Plan exempt from income tax under section 51-10 of the Income Tax Assessment Act 1997?

Answer

No

This private ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer lives in Australia and is an Australian resident for taxation purposes.

The Taxpayer is employed with an Australian Government Agency.

The Taxpayer studied a Course full-time from XXXX to XXXX to obtain a qualification at the University.

The Taxpayer obtained loans from various lenders to pay for the course tuition fees upfront.

The Taxpayer participates in the University's Plan. The Taxpayer supplied outline of Plan Guidelines outlines the following key features:

•                    xxxx

•                    xxxx

•                    xxxx

•                    xxxx

•                    xxxx

•                    xxxx

•                    xxxx.

The Taxpayer provided University Plan notices (Notices) for the period XXXX to XXXX. Total assistance received for the period was XXXX

The Notices outline the information used to calculate the Plan payments and provides the calculation.

The Taxpayer was advised by the University the assistance provided is taxable.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 11-15

Income Tax Assessment Act 1997 section 51-10

Income Tax Assessment Act 1997 section 51-35

Income Tax Assessment Act 1997 paragraph 51-35(e)

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called ordinary income.

If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the tax year. Ordinary income is generally considered to include:

•                    amounts received in return for personal services, whether received in the capacity of an employee or otherwise, and

•                    amounts received periodically or regularly and which the recipient relies on for the maintenance of themselves and/or their dependants (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540).

Payments received under a scholarship are considered to be ordinary income.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income, it is not assessable income.

Item 2.1A in the table in section 51-10 of the ITAA 1997 provides that payments are exempt from income tax if: they are made by way of scholarship, bursary, educational allowance or educational assistance; and they are not subject to the exceptions set out in section 51-35 of the ITAA 1997.

In general terms, for a scholarship to be exempt from income tax:

•                    the taxpayer must be in receipt of a scholarship and the scholarship must be provided principally for educational purposes

•                    the taxpayer must be a full-time student at a school, college or university, 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.

Section 51-35 of the ITAA 1997 states:

The following payments made to or on behalf of a full-time student at a school, college or university are not exempt from income tax under item 2.1A of the table in section 51-10 of the ITAA 1997:

(a)          a payment by the Commonwealth for assistance for secondary education or in connection with education of isolated children;

(b)          a Commonwealth education or training payment;

(c)          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;

(d)          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;

(e)          a payment under a scholarship where the scholarship is not provided principally for educational purposes;

(f)           an education entry payment under Part 2.13A of the Social Security Act 1991.

We consider the following exception would apply to the Taxpayer's circumstances:

(e)          a payment under a scholarship where the scholarship is not provided principally for educational purposes.

Scholarship not provided principally for educational purposes

To be exempt from income tax, the law specifies that the scholarship must be provided principally for educational purposes. This means there can be collateral advantages so long as the primary purpose is for educational purposes. It is not enough that an educational purpose is a by-product or incidental purpose of the scholarship. In determining the purpose of the scholarship, bursary or other educational allowance, it is the purpose of the provider of the relevant payment and not the student that is paramount.

In FCT v. Hall (1975) 6 ALR 457; 75 ATC 4156; (1975) 5 ATR 450 (Hall's case) the taxpayer was offered a fellowship by the Asthma Foundation of Tasmania on the basis that he would undertake work in relation to a respiratory survey that the foundation was linked to. He then registered as a candidate for a Doctor of Medicine with the University of NSW with the basis of his doctorate research project being the respiratory survey. He received a scholarship from the university with funds provided by the foundation. The scholarship did not qualify for exemption under s 23(z) of Income Tax Assessment Act 1936 (predecessor to section 51-35 of the ITAA 1997) as the scholarship was not provided for educational purposes. On the evidence, the NSW Supreme Court found that the purpose of the foundation in providing the scholarship was not for the education of the recipient, but for the purposes of the foundation

Principal purpose

A 'principal purpose' need not involve commercial benefits. For example, in a government program for a bonded scholarship, the fact that there is an intended work outcome such as geographical placement, means that the principal purpose of the provider of the scholarship is not one (principally) of providing education. The principal purpose is one of ensuring that certain activities are provided in a particular area by the former student, consistent with the main purpose of the government, being its policy intent, and not providing education to a particular student or students

Application to the Taxpayer's circumstances

To meet the requirements set down in section 51-10 of the ITAA 1997, the Taxpayer must be a full-time student at a school, college or university when in receipt of the funds. The Plan is not available to students only to graduates.

As studies are to be completed before applying to the Plan, the payments received cannot meet the requirements in section 51-10 of the ITAA 1997. The Taxpayer is not a full-time student at a school, college or university at the time the payments were received. The Commissioner has no discretion to ignore the requirement that the recipient must be a full-time student.

We considered your comments; that if the Taxpayer were studying and receiving this, it would be tax exempt under section 51-10; the amounts being received are contributions towards loan repayments of tuition fees outstanding from the study; and the payment is provided for educational purpose only.

However, upon examining all the information we do not consider the primary purpose of the Plan is for the education of the Taxpayer.

The principal purpose of the University can be seen in the Plan's Guidelines, which confirms:

Xxxx.

Whilst the Plan funds are to be used to pay off educational loans incurred because of education; the principal purpose is to support the Course graduates career choices. The primary purpose is to enable them to pursue lower paying employment roles in the public service or private sector despite their level of debt.

Therefore, the Plan's payments from the University do not meet the requirements in section 51-10 of the ITAA 1997 as the Taxpayer is not a full-time student at a school, college or university at the time. Paragraph 51-35(e) would also apply to exclude the payments from being exempt income as they are not provided principally for educational purposes.