Taxpayer Alert TA 2007/6: Scholarship Trusts and Education Funding Programs
Date of issue: 14 June 2007
Status: Current


Description: The Alert applies to arrangements having the following features: 1. A taxpayer applies to an entity controlled by the marketer of the arrangement, based either in Australia or in a foreign country, for a student (usually related to the taxpayer) to be accepted into a purported 'Education Funding Program' ('the program'). The program offers assistance in the form of a 'student loan', 'scholarship', 'bursary', 'educational allowance', or 'educational assistance,' 2. If the student is accepted into the program the taxpayer is invited to contribute money to a purported 'Scholarship Trust' that is associated with the program, controlled by the marketer of the arrangement, and based either in Australia or in a foreign country. 3. The marketing of the arrangement may include the claim that the money contributed by the taxpayer may be in the form of a 'distribution' from a trust (including from a service trust), an 'assignment' from a partnership or a 'distribution' from a joint venture. 4. An 'Individual Scholarship Trust' for the student is then purportedly established, either in Australia or in a foreign country, for the purpose of receiving educational assistance that is granted to the student. The Trustee of the 'Individual Scholarship Trust' is an associate of the marketer of the arrangement. 5. When educational assistance is granted, the 'Scholarship Trust' transfers the assistance to the 'Individual Scholarship Trust'. The trustee of the 'Individual Scholarship Trust' then distributes to, or expends funds on behalf of, the student an amount referred to as a 'student loan', 'scholarship', 'bursary', 'educational allowance' or 'educational assistance,' 6. The marketing of the arrangement includes the claim that the assistance provided to the student is a 'scholarship', 'bursary', 'educational allowance' or 'educational assistance' which is exempt from income tax. 7. The marketing of the arrangement also includes the claim that, where the assistance provided to the student is referred to as a 'student loan', that loan may be subsequently forgiven without an amount being included in the assessable income of the student. 8. The marketing of the arrangement may also include the claims that the 'Scholarship Trust' is liable to tax in Australia on the 'distribution' or the 'assignment' contributed by the taxpayer and that the 'Scholarship Trust' receives a deduction for funds it transfers to the 'Individual Scholarship Trust,' 9. In variations to these arrangements the marketing may include the claim that surplus funds of the 'Individual Scholarship Trust' may be invested in a ten year 'Investment Bond' where the funds will accumulate free of tax. | 1. A taxpayer applies to an entity controlled by the marketer of the arrangement, based either in Australia or in a foreign country, for a student (usually related to the taxpayer) to be accepted into a purported 'Education Funding Program' ('the program'). The program offers assistance in the form of a 'student loan', 'scholarship', 'bursary', 'educational allowance', or 'educational assistance,' 2. If the student is accepted into the program the taxpayer is invited to contribute money to a purported 'Scholarship Trust' that is associated with the program, controlled by the marketer of the arrangement, and based either in Australia or in a foreign country. 3. The marketing of the arrangement may include the claim that the money contributed by the taxpayer may be in the form of a 'distribution' from a trust (including from a service trust), an 'assignment' from a partnership or a 'distribution' from a joint venture. 4. An 'Individual Scholarship Trust' for the student is then purportedly established, either in Australia or in a foreign country, for the purpose of receiving educational assistance that is granted to the student. The Trustee of the 'Individual Scholarship Trust' is an associate of the marketer of the arrangement. 5. When educational assistance is granted, the 'Scholarship Trust' transfers the assistance to the 'Individual Scholarship Trust'. The trustee of the 'Individual Scholarship Trust' then distributes to, or expends funds on behalf of, the student an amount referred to as a 'student loan', 'scholarship', 'bursary', 'educational allowance' or 'educational assistance,' 6. The marketing of the arrangement includes the claim that the assistance provided to the student is a 'scholarship', 'bursary', 'educational allowance' or 'educational assistance' which is exempt from income tax. 7. The marketing of the arrangement also includes the claim that, where the assistance provided to the student is referred to as a 'student loan', that loan may be subsequently forgiven without an amount being included in the assessable income of the student. 8. The marketing of the arrangement may also include the claims that the 'Scholarship Trust' is liable to tax in Australia on the 'distribution' or the 'assignment' contributed by the taxpayer and that the 'Scholarship Trust' receives a deduction for funds it transfers to the 'Individual Scholarship Trust,' 9. In variations to these arrangements the marketing may include the claim that surplus funds of the 'Individual Scholarship Trust' may be invested in a ten year 'Investment Bond' where the funds will accumulate free of tax. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangements outlined above give rise to taxation issues which include whether: (a) the money contributed by the taxpayer to the 'Scholarship Trust' is properly categorised as a distribution from a trust, an assignment from a partnership or a distribution from a joint venture; (b) there exists an income tax liability of the 'Scholarship Trust' and of the 'Individual Scholarship Trust' in Australia and/or overseas; (c) payments from the 'Scholarship Trust' to the 'Individual Scholarship Trust' are deductible to the 'Scholarship Trust,' (d) the 'Individual Scholarship Trust' distributions to the student, or the expenditure by the trustee of that trust on behalf of the student, are exempt income of the student under section 51-10 of the Income Tax Assessment Act 1997 (see Note 1); (e) the payments made to a student, or for their benefit, are deductible in the calculation of the taxable income of the 'Individual Scholarship Trust,' (f) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | (a) the money contributed by the taxpayer to the 'Scholarship Trust' is properly categorised as a distribution from a trust, an assignment from a partnership or a distribution from a joint venture; (b) there exists an income tax liability of the 'Scholarship Trust' and of the 'Individual Scholarship Trust' in Australia and/or overseas; (c) payments from the 'Scholarship Trust' to the 'Individual Scholarship Trust' are deductible to the 'Scholarship Trust,' (d) the 'Individual Scholarship Trust' distributions to the student, or the expenditure by the trustee of that trust on behalf of the student, are exempt income of the student under section 51-10 of the Income Tax Assessment Act 1997 (see Note 1); (e) the payments made to a student, or for their benefit, are deductible in the calculation of the taxable income of the 'Individual Scholarship Trust,' (f) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | Note 1 | The Tax Office view as published in Taxation Ruling TR 93/39 is that a 'scholarship, bursary or other educational allowance or educational assistance' is an award for merit attained as a result of competition or selection on the basis of general criteria. There is an issue as to whether the payments made by the trusts in the arrangement described in this alert meet these criteria and consequently whether the distributions are exempt income of the student. | The Australian Taxation Office is examining these and similar arrangements . | Date of Issue: 14 June 2007 | Date of Effect: 14 June 2007 | Related Rulings/Determinations: TR 93/39 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Scholarships and Education | Legislative References: Income Tax Assessment Act 1997 section 8-1 section 51-10 section 51-35 Income Tax Assessment Act 1936 section 95A section 97 section 98 Part IVA | Related Taxpayer Alerts: | Contact Officer: Leanna James Business Line: Aggressive Tax Planning Section: Technical Leadership Phone: (08) 9268 6094





Related documents: TR 93/39 | PS LA 2005/13 - Taxpayer Alerts | section 8-1 | section 51-10 | section 51-35 | section 95A | section 97 | section 98 | Part IVA | TA 2002/6

The Taxation Office view on this arrangement is set out in Taxation Ruling TR 93/39 | This Taxpayer Alert describes an arrangement where a Scholarship Trust is claimed to be established either in Australia or in a foreign country and, in combination with what is described as an 'Education Funding Program', seeks to provide funds to a student which the marketer claims are free of tax. | These arrangements seek to take an assessable income distribution from a trust and make it exempt income.