Private ruling: Scholarship income
Date of advice: 24 February 2016
Published: April 2016
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the scholarship you receive assessable income? | A1: Yes.

Relevant facts and circumstances: You are a professional. You applied for and won a scholarship related to your field of expertise. The scholarship affords the successful applicant the opportunity to study with specialist teachers and coaches. The scholarship allows the successful applicant to have certain costs to a maximum of $X covered. The scholarship money is provided to cover airfares and local travel, living costs, tuition and insurances. Other costs such as airfares, accommodation and insurance are paid directly to the service provider upon the receipt of an invoice. Any unused funds must be held in trust by the successful applicant until such time that they find a use of the funds that the scholarship provider approves of.

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

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 includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. However, if an amount is exempt, it is not included in the assessable income of a taxpayer. The words "scholarship, bursary, educational allowance or educational assistance" are not defined in the income tax legislation. The Macquarie Dictionary 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". Scholarship income is generally considered ordinary income. The Commissioner's view on the assessability of money received by way of awards and prizes is set out in Taxation Rulings IT 2145, IT 2474 and IT 167. IT 2145 addresses BHP Awards for the Pursuit of Excellence which are made to Australians who have made outstanding contributions to the pursuit of excellence in their particular fields of endeavour and who may not yet be recognised for their achievements. The ruling states: "Although undoubtedly it will be the case that awards sometimes will be made in respect of achievements directly related to a winner's vocation, business, etc., the nature of the award is that of a personal windfall or gain not having the qualities of income. Such awards therefore, will not be assessable income in the hands of recipients." The winners of the BHP Awards for the Pursuit of Excellence are chosen from six categories which are claimed to cover every occupation and pursuit so that entry is open to all, whether by nomination of others or self-nomination. The judging of the awards is by special panels including experts in the particular category and anyone who has achieved excellence will be eligible in one category or another except for employees of BHP. IT 2474 deals with the assessability of payments received under the Military Skills Award program. Military Skills Awards are made to successful participants in military skills competitions conducted in or between units in the Australian Regular Army and Army Reserve. For a member of the Australian Regular Army, participation in a military skills competition is regarded as part of his duties as an employee and the cash prizes are part of the pay and allowances arising from the performance of those duties. The cash prizes are therefore assessable income under section 6-5 of the ITAA 1997. When considering prizes won by professional sportspersons, IT 167 states in paragraph 5: "A prize or award won in circumstances where it is an incident of the taxpayer's income producing activities (for example, a 'best player' award won by a professional footballer in a newspaper competition) or where it is part of the proceeds of a business conducted by the taxpayer (for example, a prize won by an author in a literary competition) would have the character of income. It is clear from the above that prizes will not constitute assessable income if they are received as a result of the personal qualities of the recipient. However, prizes that relate to a taxpayer's income producing activities will be assessable under section 6-5 of the ITAA 1997. Taxation Ruling TR 92/15 deals with the difference between an allowance and a reimbursement. A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance (paragraph 2 of TR 92/15). A payment is a reimbursement when the recipient is compensated exactly 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. In your case, you are a professional and you were awarded a scholarship. The scholarship is intended to support the careers of persons in your field of expertise. The BHP Pursuit of Excellence Awards covers many occupations and pursuits and are not open to employees of BHP. However, the Military Skills Awards are limited to Army employees. It is considered that your fellowship award is more aligned to the Military Skills Awards and it is related to your income-producing activities. Additionally, your payments are not considered to be a reimbursement of funds. Although you must demonstrate how the funds are to be spent, you are provided with a fixed sum to put towards your study. You are not provided an exact amount to cover an expense incurred and you are not required to return any unused funds. Although some of the expenses are paid directly by the scholarship provider, it is considered that the expense was your own and was expended on your behalf. Finally, item 2.1A of the table in section 51-10 of the ITAA 1997 provides that, subject to the exceptions and special conditions contained within section 51-35 of the ITAA 1997, 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. For the scholarship to be exempt from income tax: • the taxpayer must be a full-time student at a school, college or university • the taxpayer must be in receipt of a scholarship and the scholarship must be provided principally for education purposes and, • there must be no condition that the taxpayer be an employee of the scholarship provider or enter into any contract with scholarship provider that is wholly or principally for labour. In your case, you are a not full-time student at a school, college or university. As you have not satisfied all the requirements set out in section 51-10 of the ITAA 1997, your scholarship income is not exempt from income tax. Consequently, as the scholarship income is related to your income producing activities, is not provided as a reimbursement of expenses and is not exempt from income tax, it is assessable income under section 6-5 of the ITAA 1997.