Edited version of private advice

Authorisation Number: 1051999170214

Date of advice: 31 October 2022

Ruling

Subject: Income - scholarship

Question 1

Are the scholarship payments you receive from completing milestones 1 and 2 of the scholarship conditions assessable income?

Answer

No

Question 2

Is the scholarship payment you receive from completing milestone 3 of the scholarship conditions assessable income?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a full-time student.

You are receiving a scholarship.

The scholarship provides for the receipt of payments when certain milestones are reached:

•         Milestone 1 - Received upon providing proof of enrolment in the approved course

•         Milestone 2 - Received upon completing the approved course and maintaining continuous employment in the industry for the duration of the course

•         Milestone 3 - Received upon completing one year of continuous employment in the industry after completion of the course

There is no guarantee of employment with the scholarship provider or a related entity.

There is no agreement that the provider, or related entity, has the right to your work as part of the scholarship.

You are using your scholarship funds to pay your HECS debt resulting from the course.

You are working part-time in the industry that is related to your course.

You obtained your employment yourself before you were aware of or applied for the scholarship.

You commenced employment a year before you entered into the scholarship agreement.

Your employer is not the scholarship provider or a related entity of the scholarship provider.

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. 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 makes exempt from income tax amounts paid as a scholarship, bursary, educational allowance or educational assistance to a full-time student at a school, college or university, subject to exceptions and conditions listed in section 51-35 of the ITAA 1997.

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 is relevant to your 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. Rather 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 your circumstances

In your case, there are no conditions attached to the scholarship that require you to enter into any contract or be an employee of the scholarship provider, and you are a full-time student at university. Additionally, the scholarship payments for milestones 1 and 2 are considered to be principally for educational purposes. Therefore, your scholarship income from the milestone 1 and 2 payments are exempt from tax under section 51-10 of the ITAA 1997 and do not form part of your assessable income.

The payment for milestone 3 is conditional on you continuing to work in the industry for a year following completion of the course. It is considered that the principal purpose of this payment is to encourage you to continue to work in the industry for at least a further year after completion of the course and not for educational purposes. Therefore, paragraph 51-35(e) of the ITAA 1997 will apply to exclude the payment for milestone 3 from being exempt.