Edited version of private advice

Authorisation Number: 1051780285828

Date of advice: 18 November 2020

Ruling

Subject: Assessability of scholarship

Question

Is the amount you have received under the scholarship assessable income?

Answer

Yes.

This ruling applies for the following periods:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Whilst studying full time, you applied for and received a scholarship (the Scholarship) which is administered by entity A on behalf of a government department (entity B).

You have provided a copy of the agreement between you (the Recipient) and entity A, which lists the following:

•         the purpose of the scholarship scheme (the Scheme) is to assist students, with a commitment to working in rural and regional areas, with living and tertiary expenses. The Scheme supports career pathways to rural practices, and assists rural and regional services to attract, employ and retain graduates

•         entity B has entered into a Funding Agreement with the entity A, to provide funding to allow entity A to pay Scholarships as part of the Scheme

•         the Recipient's application for the Scheme has been accepted, and entity A agrees to provide the Scholarship to the Recipient in return for a completion of a period of service at a rural or regional location as determined by entity A, and on the terms and conditions set out in this Agreement.

The agreement also lists the conditions of the Scholarship, including:

• pursue a full-time study load and pass all subjects in which the Recipient enrols
• complete all requirements of the Degree and be eligible to be awarded the Degree by the Completion of the Study Period
• participate in activities to maintain and strengthen ties to rural areas and to develop an appreciation of work as a practitioner in rural areas, including membership of a university rural health club
• acknowledging that the Recipient will be matched to a service position in a Rural Area by entity A

•        the Recipient acknowledges that if the service position to which the Recipient is employed is unable to offer the Recipient a Postgraduate Year 2 position, the Recipient must accept a service position that will enable the Recipient to fulfil the Return of Service obligation

•        the Recipient agrees to complete the Service Period at the placement service(s), or such other service position in a Rural Area as determined by entity A

•        if, for whatever reason, a Recipient does not accept an offer of the service position or Postgraduate Year 2 position where employment would commence at the Completion of the Degree, the Recipient must begin their Service Period with an appropriate service position in a Rural Area agreed to by entity A within xx months of the Completion of the Degree

•        the Service Period starts on a date nominated by entity A. During the Service Period and in order to satisfy the Obligation, the Recipient is required to work at the service position location, or another service position location in a Rural Area for not less than x months of each full calendar year at an average of at least xx hours per week, including no less than x months in any x month period

•        in the event that you do not comply with the conditions of the Scholarship agreement it will be deemed a breach of the agreement and repayment of some or all of the financial assistance will be required.

The agreement lists "RETURN OF SERVICE OBLIGATION (SERVICE PERIOD) DETAILS", which includes the location, commencement date and duration of the initial service position, and the commencement date and duration of the year 2 position.

The initial service position is with an entity associated with entity B.

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

All legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise.

Subsection 6-5(2) 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:

h)    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 Scholarship agreement whereby entity A (the payer), agreed to provide the recipient the Scholarship on behalf of entity B (the provider), in return for the recipient agreeing to complete a defined period of service at a rural or regional location as determined by entity A.

The principal purpose of the provider can be seen in the agreement between the recipient and entity A, which confirms:

the purpose of the Scheme is to assist students, with a commitment to working in rural and regional X, with living and tertiary expenses. The Scheme supports career pathways to rural practice, and assists rural and regional services to attract, employ and retain graduates.

It is considered that the principal purpose for providing the Scholarship 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.

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