Is the amount you received under the Scholarship tax exempt income?
No. This ruling applies for the following periods: Year ended 30 June 20YY Year ending 30 June 20YY The scheme commenced on: DDMMYY
You are studying a course of education. You are a recipient of a Scholarship. The Scholarship commenced a couple of years ago and is due to cease in a future year. The purpose of the Scholarship is to assist students who are willing to undertake a defined period of service with the provider. It is a requirement of the award of the Scholarship that you remain enrolled in the accredited program on a full-time basis and complete the obligation. You agree to meet, to the best of your ability, all requirements of the program.
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
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, 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 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 the payer, agreed to provide the recipient the grant on behalf of the provider, in return for the recipient agreeing to complete a defined period of service at a facility as determined by the payer. The principal purpose of the Scholarship can be seen in the policy document between the recipient and the payer, which confirms: • the purpose of the Scheme is to assist students. 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 an approved facility from the recipient consistent with the policy intent. Therefore, paragraph 51-35(e) will apply to exclude the payment of the Scholarship from being exempt. You will need to declare this payment in your tax return and pay tax on it. If you do not continue to meet the requirements to receive the scholarship you will need to amend your return.