We live in a world where nothing is free, things need to be done and bills need to be paid. One of the most important basic needs of this era is education. When it comes to bursaries, scholarships and study loans, the Income Tax Act 58 of 1962, makes provision for a tax-free benefit, to help employees save money, with regards to basic/higher education. Make sure you understand the working of bursaries, scholarships and study loans when granted by an employer – have a look at the statutory requirements below.
The applicable legislation (an overview)
Section 10(1)(q) of the Income Tax Act 58 of 1962, provides that bona fide bursaries and scholarships granted to any person to enable or assist that person to study at a recognized educational or research institution, is free from tax.
Paragraph 2(h) of the Seventh Schedule stipulates that where an employer paid an employee’s debt on behalf of the employee, such payment must be regarded as a fringe benefit, which is a taxable benefit.
The application of the above rules in the workplace
Where the benefit is granted to an employee the following requirements must be met in order to qualify for the tax-free benefit:
The bursary or scholarship will be exempt from tax where:
- The bursary is granted to an employee
- who agrees to reimburse the employer for the bursary if the employee fails to complete his/her studies for reasons other than death, ill-health or injury; or
- The bursary is granted to a relative of an employee that earns less than R600,000 per year,
- and to the extent that the bursary does not exceed R20,000 per year (or R30,000 per year for a disabled relative) in respect of:
- grade R to matric (as contemplated in the definition of ‘school’ in section 1 of the South African Schools Act, 1996 (Act No. 84 of 1996); or a qualification to which an NQF level from 1 up to and including 4 has been allocated in accordance with Chapter 2 of the National Qualifications Framework Act, 2008 (Act No. 67 of 2008); and
- in the case of further education (meaning NQF level 5 up to 10), to the extent that the bursary does not exceed R60,000 per year (or R90,000 per year for a disabled relative).
Bursaries and study loans granted as fringe benefits
Where a bursary or study loan does not fall within the ambit of the above exemption, it will be taxable in the employee’s hands. In this case, the bursary/study loan will be taxed as a fringe benefit (in terms of Paragraph 2(h) of the Seventh Schedule).
Below is a list of examples of bursaries and study loans that will be taxed as fringe benefits:
- Low-interest or interest-free loans granted by the employer to further the employee’sstudies are not regarded as bursaries, but as low or interest-free loans upon which no
value is placed;
- Where the employee is not required to repay the loan, he/she will have received a taxable benefit in terms of Paragraph 2(h) of the Seventh Schedule (payment of employee’s debt or release employee from obligation to pay debt) and employees’ tax must be deducted.
- This taxable benefit is seen as an annual payment for PAYE purposes;
- Where an employer rewards an employee for obtaining a qualification, successful completion of a study course or reimburses the employee for study expenses, such reward or reimbursement of study expenses will represent, in the case of the reward, taxable remuneration and in the case of the reimbursement of study expenses, a taxable benefit in terms of Paragraph 2(h) of the Seventh Schedule (payment of employees debt or release employee from obligation to pay debt);
- Only the taxable portion of bursaries paid to an employee or a family member of an employee is subject to the deduction of employees’ tax;
- Any bursary, which is granted subject to the condition of repayment, due to nonfulfillment of conditions stipulated in a written agreement, will be treated as a bona fide bursary until such time as the non-compliance provisions of the agreement are invoked.
- In the tax year in which such provisions are invoked, the amount of the bursary will be regarded as a loan and any benefit which an employee may have received by way of an interest-free or low-interest loan will constitute a taxable benefit in terms of Paragraph 2(f) of the Seventh Schedule.
- ABC Consultants (Pty) Ltd granted a bursary of R25,000 to each of Samantha’s children for their basic education (Samantha is an employee of ABC Consultants (Pty) Ltd).
- Samantha earns an annual salary of R390 000, a bonus of R18 000 and a housing subsidy of R8 000.
- The employer does not operate a bursary scheme that is open to the general public.
- Although Samantha’s remuneration does not exceed R600 000 per annum, the bursaries are paid in consequence of services rendered by her.
- The bursaries of R25,000 each exceed the exemption limit of R20,000 per relative, but only the taxable portion of R10,000 (R50,000 less R40,000) is subject to the deduction of employees’ tax in the hands of the employee.
- If Samantha’s remuneration however, exceeded R600,000 during the year of assessment, during which the bursaries were received, the bursaries (R50,000) would have been taxable in full.
In summary, be certain that the employee’s profile satisfies the above requirements with regards to the tax-free benefits or make sure to understand the fringe benefit tax which should be incorporated into the employee’s budget.
Should you have any questions in this regard, feel free to send your query to firstname.lastname@example.org.
Lastly, we leave you with the words of Benjamin Franklin: “An investment in knowledge pays the best interest.”
- SARS’S GUIDE FOR EMPLOYERS IN RESPECT OF EMPLOYEES’ TAX (2019 TAX YEAR);
- Interpretation Note 66: