Edited version of private advice

Authorisation Number: 1052318121512

Date of advice: 15 October 2024

Ruling

Subject: Exempt income

Question

Is the amount you received under the grant tax exempt income?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2024

Year ending 30 June 2025

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You are currently a Full Time Student.

As part of the course, you are required to undertake placements with a suitable organisation.

You have been deemed eligible for a grant and have received a payment in the relevant income years.

You have been allocated a placement.

The grant program is open to appropriately enrolled students in an accredited degree with an approved course provider. The students must be undertaking a placement in an eligible facility within the time frame of the grant program.

This policy outlines practical and financial help available to complete a placement in an eligible facility.

The grant provider has partnered with other stakeholders to offer programmes that make completing a placement at a suitable facility easier.

Grant payments vary based on eligible areas.

The program will provide students undertaking placements in eligible facilities with a per-day grant for their placement days.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year, except if an amount is exempt income (section 6-15).

Section 11-15 list certain types of exempt income, including Item 2.1A of the table in section 51-10, which 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.

For a scholarship, bursary or other educational allowance to be exempt from income tax it must be provided principally 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.

Section 51-35 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:

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. Paragraph 51-35(e) specifies the following is not exempt under section 51-10:

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

We consider the relevant exception to your circumstances to be:

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) 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.

Provider is not necessarily the payer.

In relation to the provision of the scholarship, the 'provider' is not necessarily the payer.

Where a party other than an educational institution 'funds' the scholarship and the student's activities have some relationship or connection to that party providing the funds, such as working with or for the provider, or working towards outcomes potentially beneficial to the provider, the 'funder' can be the provider for the purposes of applying paragraph (e) and analysing the 'purpose' of that party, rather than the payer (Hall's case).

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 you entered into the grant agreement whereby The Victorian Government (the payer), agreed to provide the recipient the grant on behalf of the University (the provider), in return for the recipient agreeing to complete a defined period of service at a rural or regional location as determined by the Victorian Government.

The principal purpose of the grant can be seen in the policy document between the recipient and The Victorian Government, which confirms:

the purpose of the Scheme is to assist students, with a commitment to working in rural and regional areas.

Demand for teachers in Victorian government schools continues to grow, with particular workforce challenges in remote, regional and specialist schools.

An important part of building the pipeline of teachers in remote, regional and specialist schools is supporting pre-service teachers (PSTs) to undertake teaching placements during their teaching degree in these schools. However, the cost of undertaking a placement in remote or regional areas, which can include accommodation and travel, can be a barrier to PSTs considering where to do their placements.

The PPG program(the Program) is designed to support and incentivise PSTs, including those already living in remote and regional areas, to undertake teaching placements in remote, regional and specialist Victorian government schools. Greater exposure to these settings can help build PST familiarity and connection to schools and communities, increasing the number of graduates seeking employment in these schools, as well as better preparing the workforce for future success in remote, regional and specialist settings.

The Program will provide PSTs undertaking placements in eligible Victorian government schools with a per-day grant for their placement days.

It is considered that the principal purpose for providing the grant is not for education purposes, it is to ensure a commitment of service in a rural area from the recipient consistent with the government policy intent. Therefore, paragraph 51-35(e) will apply to exclude the payment of the Scholarship from being exempt.