Case V100

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 1 July 1988.

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P.M. Roach (Senior Member)

Following his success in the Higher School Certificate examinations of 1978 the applicant was accepted as eligible for admission to the Faculty of Medicine at the University of Newcastle and for admission to course in actuarial studies at Macquarie University. He deferred for the 1978 academic year but in 1979 enrolled in actuarial studies at Macquarie University. Having done so, he sought scholarship sponsorship from among companies willing to provide financial support for students undertaking actuarial studies. His application found favour with T & G Mutual Life Society Limited (``the Society'') and I find that in due course he was notified in writing of the offer of a ``cadetship'' and that he provided a written acknowledgement of acceptance. Neither document was available to me. I was informed that copies of the documents could not be found among the records of either the applicant or that Society. However, the applicant was able to produce from the records of the Society a document, the text of which read as follows:

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``Actuarial Cadetship - Macquarie University

A limited number of cadetships are available for selected students intending to undertake full time B.A. degree course majoring in Actuarial Studies or already an undergraduate in this faculty.

The benefits and conditions relating to the course commencing in 1978 are as follows:

Benefits

      1st Year Student       $1,900
      2nd Year Student       $2,600
      3rd Year Student       $3,400
          

During vacation employment at T & G office, the cadet will receive a salary in accordance with that laid down in the Insurance Officers (Clerical Indoor Staffs') Award.

Conditions

1. The value of the cadetship will be subject to an annual review, and the Society reserves the right to withdraw it from the student in the event of unsatisfactory examination results or poor performance during vacation work.

2. Applicants will be interviewed at the State Office concerned and the successful applicants will be required to pass a medical examination.

3. (a) N.S.W. Students

• Cadets will be expected to work at Head Office during Christmas vacation. The Society will meet the cost of the return air fare and a special living-away-from-home allowance of $10.00 [sic] while the cadet is working in Melbourne.

(b) Victorian Students

• Cadets will be expected to work at Head Office during the Christmas vacation. The Society will meet the cost of the air fares to and from Melbourne. A special living-away-from-home allowance of $10.00 per week will be payable during the Macquarie University year.

4. On graduation from Macquarie University the cadet would join the Society's staff and a condition of employment will be willingness to work in Sydney or Melbourne as the Society requires.''

2. I find that the document was adopted (mutatis mutandis) for use in 1979 and sets out the provisions which applied to the applicant.

3. During the academic years 1979 to 1981 inclusive the applicant received the promised financial support. In addition during long vacations he worked for the Society as a clerk; and that, in particular, during the long vacation of the summer of the 1980/1981 fiscal year, he served as an employee of the Society, working for four weeks in its Sydney office and for four weeks in its Melbourne office.

4. Prior to December 1980, as the applicant's family home was in the country, he resided in a university college. At the end of the 1980 academic year he moved out of college to reside with others in a flat. When the 1981 academic year came to a close he was offered employment with the Society but declined to accept the offered position immediately. It was mutually arranged that he would take up a position at a later date and in due course he did so. He commenced work as an employee of the Society in accordance with that arrangement and remained in the service of the Society for something of the order of one year.

5. When he presented his return of income to 30 June 1981 he gave details of two group certificates from the Society: one disclosed as his period of ``employment'' the full 12 months, producing gross income of $4,482, from which tax amounting to $343.90 had been deducted; the other recorded the period of ``employment'' as a period of four weeks in January 1981 generating a gross income of $812 from which $136.50 had been deducted in instalments. In addition, he acknowledged having derived $506 from the Society, described as ``living-away-from-home allowance''. In his return of income he disclosed all those sums plus earnings from the University $22, lump sum payment $1 [sic] and interest $2. He claimed deductions for union subscription $4; living-away-from-home allowance $506; university fees and textbooks $166. Thereby he disclosed a taxable income of $5,149. However, he appended to his return of income a letter in which he claimed that, as to $2,025 of the $4,482, it constituted income exempt under sec. 23(z) of the Income Tax

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Assessment Act 1936 (``the Act''). In that letter he acknowledged that:

``Although my scholarship is nominally `unbonded' there was an agreement that I worked over the previous two Christmas holiday periods. Thus the scholarship income should, and was [sic], considered as assessable in both 1979 and 1980.''

6. The view so expressed led him to form the view that the $2,025 said to be exempt income was the proportion of moneys received from the Society in the period February to June 1981. However, at the hearing I am satisfied that the appropriate finding is that, although that figure is undisputed as to that period, it is also appropriate to find that scholarship income for the entire year was $3,670 and that living-away-from-home allowance related to the entire year.

7. The Commissioner disallowed the applicant's claims to deductions in relation to living-away-from-home allowance $506 and textbooks and university fees $166. By letter of 9 September 1981 the applicant objected to the assessment:

``on the grounds that a portion of my income belongs to the catagory [sic] of income described by Section 23 Subsection z [Sec. 23(z)] of the Income Tax Assessment Act. This portion (over $2000) should then not be considered as taxable income.

As I see it the only question that could cloud the issue is `Are you required to render services to that authority in the future?' The answer to this is no...''

The Commissioner acted promptly in disallowing the objection and, with similar promptitude, on 5 January 1982 the applicant requested that his objection to the disallowance be referred for independent review. That request was not complied with until 30 October 1986.

8. The applicant gave evidence at the hearing and, having considered that evidence, I have made the findings of fact set forth in the preceding paragraphs. In addition I am satisfied that at all material times there was an expectation on the part of both the Society and the applicant that he would render service to the Society as an employee during the long vacation and that upon graduation, assuming that the ``cadetship'' had not been terminated in the interim, he would be offered a position in the service of the Society. I also accept that it was understood that, if he did not serve the Society during long vacations in accordance with its expectations, he would be liable to suffer the forfeiture of his cadetship for the future. However, he would not be in breach of any legal obligation to the Society should he do so. I also find that the Society had no obligation to offer, nor he any obligation to accept, any offer of employment which might be considered following graduation. I also find that, at all material times, it was recognised on the part of both the Society and the applicant that it was quite likely that he would serve as an employee during the university long vacations and that employment would be offered him following graduation and that such an offer would be accepted.

9. In those circumstances, the question is whether or not the moneys received in his capacity as a student are ``exempt income''. The applicant's assertion is that that income is so exempt by force of sec. 23(z) which provides:

``The following income shall be exempt from income tax: -

...

• (z) income derived by way of a scholarship, bursary or other educational allowance or educational assistance (...) by a student receiving full-time education at a school, college or university, but not including -
  • (i) an amount received by the student from a person or authority upon condition that the student will (or will if required) render, or continue to render, services to that person or authority;
  • ...''

10. The case for the Commissioner is that, by reason of the proviso, the applicant is not entitled to have the income treated as exempt. The Commissioner accepts that the attendance by the applicant at his university courses throughout the year constituted ``full-time education'', notwithstanding that he was able to work as a clerk for the Society for a period of eight weeks. Accordingly, the question is to be resolved by considering the significance of the

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words ``upon condition that'' in subpara. (1). The Commissioner's representative referred to two decisions which he said supported his contention.

11. The first was Case H36 (
76 ATC 308). That case involved a science graduate who was granted a cadetship in nutrition and dietetics. It was granted by a hospital with the approval of the Hospitals Commission of N.S.W. operating under statutory charter. The Commission in due course reimbursed the hospital. The ``conditions'' of the cadetship included a provision:

``On completion of the cadetship graduates will be employed as dietitians in public hospitals with wage rates and conditions as prescribed by an award.

Trainees are required to lodge two sureties and enter into a bond to serve as dietitians in the parent hospital for a certain period after qualifying for the diploma...''

The taxpayer duly entered into a bond with the hospital as drawn up by the hospital's advisers. The Board unanimously held that the income was not exempt income. But it is significant that, in his reasons for decision, Mr Fairleigh Q.C., said:

``Clearly she did undertake to render services to the regional hospital. Thus the question of substance is whether the sum in issue was received by the taxpayer from the hospital or from the Commission.''

Having formed the view that ``the hospital was the paymaster from its own funds'', he went on to conclude that the Commissioner's determination upon the objection should be upheld. His colleagues agreed.

12. The second case relied on is Case R31 (
84 ATC 295) in which a taxpayer, who was employed in a public hospital by the Health Commission was granted two years leave of absence from her position to take up one of the Commission's Applied Science nursing scholarships. During the period of the course she was to receive a reduced rate of salary and was required to work at the hospital during the college long vacation. That is to say the relationship of master and servant which preceded the granting of the scholarship continued at all material times. The significance of the granting of the scholarship was that she was granted leave of absence from the ordinary duties of her employment while carrying out her studies but throughout she continued to be obliged to render service to her employer until such time as by appropriate steps she should come to be relieved of that obligation.

13. In my view, neither case is apt to describe the relationship between the applicant and the Society. Nor does the circumstance that the Society seems to have considered itself bound by the PAYE provisions of the Act to make deductions on account of tax and remit them to the Commissioner determine the matter.

14. In my view, there never was a contractual bargain between the applicant and the Society whereby he was to be obliged to render future service to the Society. I accept that he was without obligation in that regard. If he had failed to take up appointment with the Society upon graduation that circumstance would have had no consequences. If he had failed to serve the Society during long vacations that circumstance might have led to the termination of the cadetship, but no more. As much might have happened if his performance in examinations had been considered unsatisfactory by the Society.

15. The Parliament has chosen to provide that a scholarship income such as the applicant received should not be exempt from tax if there was a ``condition'' that future services be rendered. The Parliament might have provided that the exemption would be forfeited if there was an ``expectation'', or a ``likelihood'', or a ``probability'' that services would be rendered in the future. It chose not to do so. In my opinion the scholarship income was exempt pursuant to sec. 23(z) of the Act.

16. However, as the objection of the applicant only protested the assessment of portion of the scholarship income, the order of the Tribunal will be that the determination of the Commissioner upon the objection shall be varied and that taxable income of the applicant for the year of income ended 30 June 1981 will be reduced by $2,025 to $3,796.