Private ruling: Income - scholarship
Published: November 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 01 July 2011

Ruling: Q1: Do the payments form part of your ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are the payments exempt from income tax? | A2: No

Relevant facts and circumstances: You were accepted into a course of study. Due to the overwhelming demand for the course your offer was withdrawn. You were subsequently offered a place in the intake for the following year. In recognition of the inconvenience caused by the deferral of your studies, the education institution granted you a payment to the value of $X. The payments will be provided per semester upon commencement of your full-time study.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 6-15 | Income Tax Assessment Act 1997 section 51-10 | Income Tax Assessment Act 1997 section 51-35

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has been held to include income from providing personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: · are earned, · are expected or relied upon, · have an element of periodicity, recurrence or regularity, or · replace income. In your case, you will be receiving payments of which will be paid periodically whilst undertaking your course of study. These payments will provide you with a degree of financial support whilst undertaking the course of study. They will be a financial resource that you can rely upon and apply to meet costs associated with your studies or to meet your living needs. Accordingly the sponsorship payments are considered to be ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Scholarship: The words 'scholarship, bursary, educational allowance or educational assistance' are not defined in the ITAA 1997. The Macquarie Dictionary, 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'. Paragraphs 34 to 45 of Taxation Ruling TR 93/39 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 ( Re Leitch, deceased [1965] VR 204); and · the education of the recipient is at least one purpose for which the scholarship is provided ( FC of T v. Hall (1975) 6 ALR 457; 75 ATC 4156; (1975) 5 ATR 450) ( Hall's case ). In your case, you will be receiving the payments in recognition of the inconvenience caused by the deferral of the course; however you will only receive these payments at the commencement of your full-time study. As such, there is an educational purpose behind these payments. Therefore your payments are considered to be made by way of a scholarship, bursary, educational allowance or educational assistance. | Detailed Reasoning - Exempt income: Section 6-15 of the ITAA 1997 provides that if an amount is exempt income, then it is not included in the assessable income of a taxpayer. Item 2.1A of the table in section 51-10 of the ITAA 1997 provides that, income received by way of a scholarship, bursary, educational allowance or education assistance by a full-time student at a school, college or university is exempt from income tax. This is subject to the exceptions and special conditions contained within section 51-35 of the ITAA 1997. For a scholarship to be exempt from income tax: · you must be a full-time student at a school, college or university, · you must be in receipt of a scholarship and the scholarship must be provided principally for educational purposes, and · there must be no condition that you be an employee of the scholarship provider or enter into any contract with the scholarship provider that is wholly or principally for labour. In your case, although there is an educational purpose behind your payments, the primary purpose of these payments is to compensate you for the inconvenience caused by the deferral of your studies. As such, your payments are not considered to be principally for educational purposes. Therefore the payments are excluded from the exemption under section 51-35 of the ITAA 1997. Accordingly, you will have to include these payments in your assessable income under section 6-5 of the ITAA 1997.

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