Students under 16
All MRCAETS payments made to students under 16 years of age are exempt from tax (see s51-10 table item 2.1A of the Income Tax Assessment Act 1997 (ITAA)).
Students over 16 – general tax status
Payments made to students who are over the age of 16 are considered to be ‘Commonwealth education or training payments’ under s52-145 of the ITAA. The Australian Tax Office considers the Schemes' allowances to be the student's income because the student is the person who derives income from the payments (i.e. regardless of whether the payments are made or otherwise re-directed to a third party, including their parent/s).
Education Allowances paid to students 16 years of age and over are taxable, but supplementary payments are exempt. This exemption refers to all payments other than Education Allowance, such as Special Assistance and Additional Tuition (see s52-140(3) of the ITAA).
Students over 16 – following death acceptance
Payments made under the MRCAETS are tax-free for students aged 16 and over where they are eligible for the Scheme due to the death of their veteran parent (including deaths accepted under the MRCA and VEA, and VEA double orphans). Where a student aged over 16 is already receiving support under the MRCA and their veteran parent’s death is subsequently accepted, their payments will become tax-free.
The Student-Start Up and Relocation Scholarships are both non-taxable.
9.5.3.7.1 Tax withholding under MRCAETS
Under MRCAETS, students are not required to provide their TFN, however if they do not provide a TFN then the maximum rate of taxation must be withheld from their education allowance.
DVA is required under tax law to withhold tax deductions from the education allowance provided to students aged 16 years and over and who are not subject to tax-free treatment (see 9.5.3.7) . This includes students eligible for MRCAETS due to the death of their veteran parent.
The total annual education allowance paid under MRCAETS is less than the annual tax-free threshold and so DVA may withhold nil tax where a student requests DVA apply the tax-free threshold to their education allowance.
If the student does not provide their tax file number, then the maximum taxation rate must be withheld.
If the student does provide their tax file number but does not elect to apply the tax-free threshold to their education allowance, then the minimum tax that must be withheld is calculated using the tax rate tables provided by the Australian Taxation Office
* Note: Under s.52-114 of the Income Tax Assessment Act 1997, in particular item 16 of the Table in that section, a payment under the MRCAETS to an eligible young person who is an orphan (see s.258(1)(b) MRCA) is tax-exempt as it is "a payment because of a person's death" under s.258 MRCA (provision under which the MRCAETS is made).
9.5.3.7.2 Tax withholding for non-Australian residents
Under paragraph 2.6.2 of the Instruments, the Commission may approve payment of an education allowance to a student who is living overseas and not on a formal exchange or scholarship program for less than 12 months if it deems there are ‘exceptional circumstances’.
Students approved as having ‘exceptional circumstances’ who are living overseas and are 16 years of age or older will not be considered an Australian resident by the Australian Taxation Office for taxation purposes. Accordingly, these students will be deemed to be ‘foreign residents and so’ will not be entitled to the tax-free threshold. Higher withholding tax rates may also apply to foreign residents receiving an Australian income. Please see the Australian Taxation Office website for more information.