Income tax: Indigenous Training and Recruitment Initiatives Scholarships

This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

The relevant provisions dealt with in this Ruling are: • section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); • section 6-10 of the ITAA 1997; • section 51-10 of the ITAA 1997; • section 104-25 of the ITAA 1997; • section 118-20 of the ITAA 1997; and • section 118-37 of the ITAA 1997. All legislative references are to the ITAA 1997 unless otherwise indicated.

The class of entities to which this Ruling applies is full-time students who occupy university places funded by the Victorian Government under an Indigenous Training and Recruitment Initiatives (INTRAIN) Scholarship. In this Ruling, a person belonging to this class of entities is referred to as a student.

The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 9 to 22 of this Ruling.

If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: • this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

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This Ruling applies from 1 July 2010 to 30 June 2016. The Ruling continues to apply after 30 June 2016 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

The following description of the scheme is based on information provided by the applicant. The following documents, or relevant parts of them, form part of and are to be read with the description: • Class Ruling application, dated 28 April 2010; • INTRAIN Scholarship Funding Agreement Terms and Conditions; and • Department of Health Guidelines for Applicants. Note: certain information has been provided by the applicant on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation.

The INTRAIN Scholarship Scheme is funded by the Department of Health (DH) on behalf of the Victorian Government. DH provides funding to appropriate universities that allocate the scholarship to eligible students.

The main objective of the INTRAIN Scholarship is to increase the number of public health practitioners among Aboriginal and Torres Strait Islander people.

To apply for an INTRAIN Scholarship, applicants must be enrolled in a post-graduate program that has a major focus on public health issues.

A person is eligible to apply for an INTRAIN Scholarship if the person: • is of Australian Aboriginal or Torres Strait Islander descent; and • identifies as an Australian Aboriginal or Torres Strait Islander; and • is accepted as such by the community in which he/she lives or has lived; and • resides in Victoria or will live in Victoria upon completion of their course.

The INTRAIN Scholarship is awarded to applicants based on merit with consideration to: • the applicant's involvement with, and connection to, the Koori community; • evidence of professional commitment to the health of the Aboriginal and Torres Strait Islander community and assessed potential to contribute to evidence-based practice in the future; • past academic results and assessed ability to complete the course; and • referee reports.

A full-time INTRAIN Scholarship provides an annual stipend of $25,470, paid to the student on a fortnightly basis for the duration of the course of study, subject to satisfactory progress.

A Doctoral student is also eligible for an additional payment of up to $3,000 for the duration of the course of study to cover conference travel and registration, professional development and other costs associated with the study program. This additional payment is made by way of a reimbursement of expenses by the university and it is funded by DH.

The university is responsible for the student's academic supervision.

Students may be required to work part-time to practice their academic skills during their course of study. Work patterns are varied and dependent on individual student's study work load. Most students would be paid for this work by the relevant employer.

Students may be permitted to undertake paid employment outside the requirements of the approved course of study but they will need the approval of the university to undertake any such employment.

However, eligibility for the scholarship is not conditional upon the student agreeing to continue in or take up employment with the scholarship provider or any other organisation.

The scholarship will be terminated in the event of unsatisfactory academic performance by the student. Such a decision will be made by DH in consultation with the university. The scholarship will also be terminated if the student ceases to be enrolled in the university course.

If DH determines that a student has made a misrepresentation regarding their past and/or present circumstances that were relied upon by DH in awarding a scholarship, the student will be required to repay the full amount of the scholarship received if requested by DH.

The fortnightly stipend payments made to students awarded an INTRAIN Scholarship, are assessable income to the student under subsection 6-5(1). However, these payments are exempt from income tax under item 2.1A in the table in section 51-10.

CGT event C2 under section 104-25 happens when students receive payments under the INTRAIN Scholarship program. However any capital gain made as a result of receiving the payments is reduced to nil under section 118-20.

The payment to Doctoral students of up to $3,000 to cover conference travel and registration, professional development and other costs associated with the study program is not assessable to the student as ordinary income under section 6-5 or as statutory income under section 6-10.

CGT event C2 under section 104-25 happens when Doctoral students receive the payment of up to $3,000. However, any capital gain or capital loss is disregarded under subsection 118-37(2).

A payment or other benefit received by a taxpayer is assessable income if it is: • income in the ordinary sense of the word (ordinary income); or • an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Subsection 6-5(1) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

The legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation , [1] the Full High Court stated: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income, as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. [2] Amounts paid in substitution for salary or wages foregone or lost may also be ordinary income. [3]

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. [4] The whole of the circumstances must be considered [5] and the motive of the payer may be relevant to this consideration. [6]

Section 6-10 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included as assessable income by another provision.

Section 10-5 lists provisions about statutory income and included in this list is section 15-2.

Section 15-2 includes in a taxpayer's assessable income the value of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to the taxpayer 'in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by' the taxpayer.

Subsection 6-20(1) provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Amounts of ordinary income and statutory income are exempt from income tax under section 51-1 if the amount is of a type listed in the tables in Division 51, subject to any exception or special condition.

Item 2.1A in the table in section 51-10 provides that payments are exempt from income tax if: (a) they are made to a full-time student at a school, college or university; (b) they are made by way of a scholarship, bursary, educational allowance or educational assistance; and (c) they are not subject to the exceptions set out in section 51-35.

Fortnightly stipend payments received by a student are considered to be ordinary income, being periodical receipts that are expected and relied upon by the student.

As the fortnightly stipend payments are ordinary income, it must be established whether or not they are exempt income under Division 51. This requires a consideration of three conditions.

In these circumstances, it is accepted that the INTRAIN Scholarship students undertaking the full-time study program at the University satisfy this criteria.

The words 'scholarship, bursary, educational allowance or educational assistance' are not defined in the ITAA 1997. The Macquarie Dictionary , 1991, 2nd Revised Edition, defines 'scholarship' as 'the sum of money or other aid granted to a scholar' and 'scholar' as 'a student who, because of merit, etc, is granted money or other aid to pursue.....studies'. 'Student' is defined as 'one who is engaged in a course of study and instruction at a college, university, or professional or technical school' and 'one who studies a subject systematically or in detail'.

Paragraphs 34 to 48 of Taxation Ruling TR 93/39 Income tax: friendly society education funds, discuss the meaning of the words 'scholarship, bursary, educational allowance or educational assistance' for the purposes of the former paragraph 23(z) of the Income Tax Assessment Act 1936 . Paragraph 35 of TR 93/39 states that the words are no more '...than a description of rewards for merit attained as a result of competition or selection on the basis of general criteria...'.

In interpreting the meaning of the words 'scholarship, bursary, educational allowance or educational assistance', courts have determined that the relevant characteristics of a scholarship include: • the selection of recipients based on merit or some other rational criterion; [7] and • the education of the recipient is at least one purpose for which the scholarship is provided. [8]

To be awarded an INTRAIN Scholarship, students have to undertake a competitive selection process which involves them being assessed against a range of criteria such as their academic achievements and interpersonal skills. As such, it is accepted that selection for the INTRAIN Scholarship is merit based.

In Chesterman v. Federal Commissioner of Taxation [9] Isaacs J said that for purposes to be educational they must provide for the giving or imparting of instruction.

The INTRAIN Scholarship is paid to a student enrolled in a course with a major focus on public health issues. It is accepted that the INTRAIN Scholarship has the requisite educational purpose.

Accordingly, it is accepted that payments made under the INTRAIN Scholarship are made by way of 'a scholarship, bursary, educational allowance or educational assistance'.

Section 51-35 excludes the following payments from exemption: • payments by the Commonwealth for education or training: paragraphs 51-35(a), 51-35(b) and 51-35(f); • payments made on the condition that the student will (or will if required) become an employee of the payer: paragraph 51-35(c); • payments made on the condition that the student will (or will if required) enter into a contract with the payer that is wholly or principally for the labour of the student: paragraph 51-35(d); and • payments made under a scholarship that is not provided principally for educational purposes: paragraph 51-35(e).

The payments made under the Scholarship are not of a kind covered by paragraphs 51-35(a), 51-35(b) or 51-35(f).

Paragraph 51-35(c) excludes payments from exemption if they represent: 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.

The Federal Court has taken the view that the words 'upon condition that' do not require a contract between the parties to exist or any other form of legal relationship. [10] It was held that the exemption did not apply where, as a matter of ordinary language, it could be said that the receipt of the scholarship amount was conditional on the recipient working with the payer if the payer so required.

The terms of the INTRAIN Scholarship put the student under no obligation (whether or not legally binding) to become an employee of DH in the future, or to do so if required.

The payments under the INTRAIN Scholarship are therefore not excluded from exemption under paragraph 51-35(c).

Paragraph 51-35(d) excludes payments from exemption if they represent: 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.

Paragraph 51-35(d) imposes a similar requirement to that of paragraph 51-35(c) by excluding employment-like relationships, that is, contracts wholly or principally for labour.

It is recognised that work performed for an organisation can be part of an education program. [11]

In circumstances where work is carried out solely or primarily for an educational purpose and its results are not calculated to benefit the organisation but are incidental products of the study program, there is no contract wholly or principally for the labour of the student.

The terms of the INTRAIN Scholarship put the student under no obligation (whether or not legally binding) to enter into a contract wholly or principally for the student's labour in the future, or to do so if required.

The payments under the INTRAIN Scholarship are therefore not excluded from exemption under paragraph 51-35(d).

The INTRAIN Scholarships are awarded to a student to enable them to complete a study program in public health.

It is accepted that in providing the INTRAIN Scholarships DH is doing so principally for educational purposes. The INTRAIN Scholarship payments are therefore not excluded from exemption by paragraph 51-35(e).

Accordingly, the fortnightly stipend payments made to a student are exempt under item 2.1A of the table in section 51-10.

A student's entitlement to receive fortnightly stipend payments is a CGT asset under subsection 108-5(1) that is acquired when the application for the INTRAIN Scholarship is approved.

CGT event C2 happens under section 104-25 when a student's entitlement to receive fortnightly stipend payments is satisfied. The time of the CGT event under subsection 104-25(2) is when the payment is made.

However, any capital gain made from the CGT event C2 is reduced under section 118-20. Subsection 118-20(1) reduces a capital gain by an amount that is included in exempt income. Fortnightly stipend payments are exempt income and therefore any capital gain is reduced to zero.

The payment of up to $3,000 to Doctoral students to cover conference travel and registration, professional development and other costs associated with the study program is a reimbursement of the student's actual expenses and not an allowance. As explained by Taxation Ruling TR 92/15 [12] which deals with the distinction between an allowance and a reimbursement for income tax and fringe benefits tax purposes: A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider.

It is considered that the payment of up to $3,000 to Doctoral students is not assessable as ordinary income as it does not satisfy the criteria for ordinary income. The payment is a direct reimbursement of expenses incurred as part of the education course which are not the product of any employment or services rendered and not ordinary income in the hands of the student.

The payment of up to $3,000 paid to Doctoral students is not provided to them as employees. Nor is it provided 'in respect of, or for or in relation directly or indirectly to' any services rendered by them, as there is no element of reward in the payment for any services they might provide. [13] The payment is given solely to support the student's professional education and development in matters integral to the study program. Any amounts the student receives in reimbursement of costs incurred in attending conferences and training sessions are, therefore, not assessable income under section 15-2.

The payment of up to $3,000 paid to Doctoral students is neither ordinary nor statutory income.

A Doctoral student's entitlement to receive reimbursement payments of up to $3,000 is a CGT asset under subsection 108-5(1). The entitlement is acquired when the application for the INTRAIN Scholarship is approved.

CGT event C2 happens under section 104-25 when Doctoral student's entitlement to receive a reimbursement payment is satisfied. The time of the CGT event under subsection 104-25(2) is when the payment is made.

However, any capital gain or capital loss resulting from CGT event C2 is disregarded under paragraph 118-37(2)(a). This provision provides a CGT exemption for a capital gain or capital loss that results from the receipt of a payment as reimbursement under a scheme established by an Australian government agency under an enactment. The INTRAIN Scholarship is such a scheme.

The following is a detailed contents list for this Ruling: Paragraph Paragraph What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 4 Date of effect 8 Scheme 9 Ruling 23 Fortnightly stipend payments 23 Doctoral payments 25 Appendix 1 - Explanation 27 Ordinary income 28 Statutory income 33 Exempt income 36 Fortnightly stipend payments 39 Are scholarship holders full-time students at a school, college or university? 41 Are the payments made by way of scholarship, bursary, educational allowance or educational assistance? 42 Do the exceptions in section 51-35 apply? 49 Are the payments Commonwealth education or training payments ? 50 Are the payments made on the condition that the student will (or will if required) become or continue to be an employee of the payer ? 51 Are the payments made on the condition that the student will (or will if required) enter into, or continue to be a party to, a contract with the payer that is wholly or principally for the labour of the student ? 55 Are the scholarships provided principally for educational purposes ? 61 Capital gains tax 64 Doctoral payment 67 Capital gains tax 71 Appendix 2 - Detailed contents list 74