Private ruling: Fringe Benefits Tax - Repayment of scholarship money
Date of advice: 25 January 2016
Published: March 2016
Ruling period: FBT year commencing 1 April 2015
Date scheme commenced: 1 March 2014

Ruling: Q1: If an assisted student has received scholarship entitlements, but due to termination/breach of the scholarship contract, they are required to pay all, or part, of the scholarship entitlements over a set period, will there be a loan fringe benefit? A) Where the student has not commenced bonded employment and B) Where the student has commenced bonded employment. | A1: No | Q2: If the debt to the assisted student is waived, will this be a debt waiver benefit for Fringe Benefits Tax (FBT) purposes? | A2: No

Relevant facts and circumstances: The employer is a Government department. The department operates a scholarship Scheme which provides scholarships to students to enable them to pursue their studies. The assisted student undertakes study in a course at a university, institute, college or other provider of educational services. The course of study will be the theory base for a position that has been identified as a "highly in demand" position required by the department. A scholarship is only offered to a student who has undergone a stringent selection process and has been found to be suitable. The scholarship agreement covering the student's entitlement and obligations is reduced to writing. The student enters into a contract with the department ("the contract") when awarded the scholarship. The contract contains the terms and conditions of the scholarship and is a contract within the meaning of that term under the relevant state legislation. Payment of the entitlement is made periodically through the period of the course of study so long as the student continues to achieve the required level of grade. Following the successful completion of the tertiary course and if the student is deemed to be suitable, the department may make the student an offer of employment. The students will, if offered a position, take up the position or may be required to repay all or part of the scholarship. The contract stipulates the bonded service period for the assisted student. Clause 8.1 of the contract states that "if the assisted student withdraws from Bonded Service, the Assisted Student will be required to repay the Scholarship (including living allowance, education reimbursement and HECS - HELP payments) paid by the department…". Clause 8.3 informs the assisted student that all funds need to repaid within six years of leaving the program. "In accordance with the Fair Work Act 2009 , the department will set a repayment schedule with the Assisted Student for all funds to be repaid to the department within 6 years of exit from the program".

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1985 subsection 136(1)

Reasons for decision: Summary: The repayments of scholarship money do not fall within the FBT legislation. | Detailed Reasoning - Detailed reasoning: A 'fringe benefit' as defined in subsection 136(1) of the FBTAA is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted. The phrase "in respect of" is defined in subsection 136(1 ) of the FBTAA in relation to the employment of an employee to include by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. The fact that the definition of "fringe benefit" brings in only benefits provided in-respect-of-employment, to some extent limits the scope of the Act. A benefit that happens to be provided to an employee (or associate, etc) but which is not in respect of their employment is not a fringe benefit. In Starrim Pty Ltd v FC of T 2000 ATC 4460, for example, a bank loan on-lent by a company to its sole directors did not result in a loan fringe benefit because there was not the necessary connection between employment and the benefit. Rather, there was a commercial purpose underlying the loan. In J&G Knowles & Associates v FC of T 2000 ATC 4151, the phrase ''in respect of'' was held to require a ''nexus, some discernible and rational link, between the benefit and employment''. However it could not be said that any causal relationship between the benefit and the employment was a sufficient link so as to result in a taxable transaction. What must be established was whether there was a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment. A repayment of scholarship money due to a termination of employment and or breach of the scholarship contract will not have a sufficient or material connection to the former employment to fall within the meaning of "fringe benefit". The Commissioner considers the following as relevant in determining that there is no sufficient or material connection between the repayment of scholarship costs and the employment of the employee: • the breach caused by the termination of employment, is not a breach of the employment contract it is a breach of the scholarship contract. As the repayments of money back to the department are totally related to the scholarship contract and not the employment, these repayments fall outside the FBT legislation. In summary, there is no loan fringe benefit or debt waiver fringe benefit in these circumstances.