Edited version of private advice

Authorisation Number: 1052321064433

Date of advice: 21 October 2024

Ruling

Subject: Assessable income

Question

Are the Grant payments you received assessable income for income tax purposes?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You were successful in receiving grant income.

As part of the program there are a number of payments.

Conditions of the grant provide that students are to commence employment in specific locations, in the year they are awarded the grant.

The students must also complete an educational requirement in that they must have successfully completed an appropriate course.

The funding guidelines provide a list of courses that meet the requirements of the grant.

To be eligible for the first payment, you were required to provide an employment contract showing that you would be employed for a minimum of several months.

To receive future payments, you are to provide evidence via pay slips and an employment contract, that the criteria had been met and that you did have a contract for several months.

Funding purpose

The department is awarding grants to incentivise final year students to practise in specific areas.

You finished university classes and exams in a prior year.

You submitted your application for the grant.

You graduated in the required course.

The 1st payment was received in the month after you graduated.

You commenced full-time permanent work which was subject to the successful completion of a degree, registration and safety screening requirements.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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 payer agreed to provide you the grant in return for you agreeing to complete a defined period of service at a specific location.

The principal purpose of the grant is to incentivise final year students to practise in specific locations due to a shortage of professionals in these areas.

It is considered that the principal purpose for providing the grant is not for education purposes, it is to ensure a commitment of service. Therefore, paragraph 51-35(e) will apply to exclude the payment of the scholarship from being exempt.