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Taxation Status of Postgraduate Awards
Dr Kim Jackson
Social Policy Group
May 1997
Concern has been expressed that legislation currently before Parliament
amending the taxation laws will result in the stipends received by students
with Australian Postgraduate Awards becoming taxable. This Research Note
examines this question.
Under section 23(z) of the Income Tax Assessment Act 1936 income
from a scholarship or educational allowance received by a full-time student
at a university is exempt from income tax. However, ss.23(z)(iv) specifically
excludes Post-graduate Awards granted under the Student Assistance
Act 1973 from this exemption (ie. these awards are not exempt
from income tax).
In 1990 the funding of Postgraduate Research Awards was transferred
to institutions through the Higher Education Funding Act 1988.
Postgraduate Course Awards were similarly transferred in 1991.
The Taxation Laws Amendment Bill (No.1)1997 currently before
Parliament amends ss.23(z) of the Income Tax Assessment Act 1936
to repeal paragraphs 23(z)(ii) to (x) and to replace them with '(ii) a
Commonwealth education or training payment'. This is defined as:
- a payment by the Commonwealth of an allowance or reimbursement to
or on behalf of:
- a participant in a Commonwealth labour market program; or
- a student under a scheme of assistance to students administered by
the Commonwealth, where the payment is in respect of a period starting
at or after the time when the student turned 16.
Does this definition encompass postgraduate awards? The administration
of postgraduate awards is now the responsibility of the higher education
institutions rather than the Commonwealth. Although their expenditure
on postgraduate awards is subject to Ministerial approval and conditions
under ss.23(1) of the Higher Education Funding Act 1988 it is the
institutions who select, pay and supervise the students. The Government
policy paper, Research for Australia: Higher Education's Contribution
(May 1989) stated that the Government had accepted the proposal 'that
the research awards scheme no longer be administered under the Student
Assistance Act and that research awards be administered by higher education
institutions'(p.45). Furthermore, it is arguable whether a stipend paid
to a postgraduate by a university (generally institutions established
by and operating under State legislation) could be classified as a 'payment
by the Commonwealth'.
According to the Explanatory Memorandum accompanying the Taxation
Laws Amendment Bill (No.4) 1996 (which has been retitled the Taxation
Laws Amendment Bill (No.1) 1997), provisions relating to education
and training payments have their origin in legislation previously introduced
by the former Government [the Taxation Laws Amendment Bill (No.5) 1995]
which lapsed due to the election. The Explanatory Memorandum for the 1995
Bill referred specifically to AUSTUDY, Abstudy and the Veteran's Children
Education Scheme as examples of Commonwealth student assistance schemes,
but made no reference to postgraduate awards.
Under proposed section 51-35(1)(g) contained in the Tax Law Improvement
Bill 1996, a Postgraduate Award granted under the Higher Education
Funding Act 1988 will not be exempt from income tax.
It would thus appear that those award holders who had received their
awards under the Higher Education Funding Act since 1990 have been
exempt, but that the Tax Law Improvement Bill 1996 will (if enacted)
restore the taxation status of postgraduate awards to the situation applying
before 1990 and render award holders liable for income tax that they do
not currently have to pay. The Tax Law Improvement Bill 1996 is
the second instalment of the the Tax Law Improvement Project, which was
established in 1993 to restructure and rewrite income tax law in plain
language. It is not intended to be a means of changing tax policy.
If it is assumed that the definition contained in the Taxation Laws
Amendment Bill (No.1) 1997 does encompass postgraduate awards and
if this Bill is enacted before the Tax Law Improvement Bill 1996
then the issue of whether the latter Bill changes policy (rather than
just simplifying the law) will not arise, as postgraduate awards would
then already be taxable. However, such an assumption could be unwise given
the uncertainty surrounding the issue.
It is understood that the Taxation Office has argued that award holders
could be liable to income tax because of the operation of ss.23(z)(i)
which provides that tax is payable on 'an amount received by the student
from a person or authority upon condition that the student will (or will
if required) render, or continue to render, services to that person or
authority'. On this interpetation the intellectual property rights ceded
to the university as a condition of receipt of a scholarship fall within
the scope of 'services' rendered under ss.23(z)(i). This interpretation
has not been widely accepted and the question has not been resolved.
The Tax Office believes that most award holders do not currently pay
tax on their scholarships, but this opinion is not based on a compliance
audit. Given the tiny revenue implications (and presumably the legal uncertainties)
it is unlikely that any such audit would be undertaken.
The stipend payable to holders of Australian Postgraduate Awards is
approximately $15600 p.a. with additional expense allowances to cover
travel, thesis production and relocation. There are around 4500 holders
of awards with stipend. The total amount of income tax revenue involved
would thus not exceed $9m p.a., and would probably be much less than this
figure after allowing for rebates.
In summary:
- it would appear that Post-graduate Awards have not been taxable since
1990, when funding under the Higher Education Funding Act commenced;
- the Taxation Laws Amendment Bill (No.1) 1997 (and its 1995
predecessor) define those Commonwealth programs of educational assistance
excluded from the exemption from income tax, but it is uncertain if
this definition applies to post-graduate awards because the program
is now administered by the universities rather than the Commonwealth;
- the Tax Law Improvement Bill 1996 would definitely make the
awards taxable, but this could be in violation of the principle of the
Bill, which is to rewrite the law in plain language but not to introduce
policy changes.
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