The ability for employers and employees to structure their remuneration package to include a tax-free bursary or scholarship is one of the few mechanisms left to increase an employee’s take-home pay. Employees have been able to use their tax savings resulting from the tax-free bursary or scholarship to contribute to their own or children’s education and retirement savings.
Currently the tax legislation makes provision for bona fide scholarships or bursaries granted by employers to employees to enable or assist the employee to study at a recognisable educational institution to be exempt from normal tax.
Provided certain requirements are met, this exemption may apply in instances where an employer provides a scholarship or bursary to a relative of an employee. “Relative” in this context means the spouse of the employee, or anybody related to the employee or the employee’s spouse within the third degree of consanguinity.
The potential reach of the definition of “relative” is accordingly very wide – including the employee’s grandchildren, brothers and sisters or nephews and nieces. In addition, adopted children are deemed to be the biological child of their adoptive parents for purposes of this definition.
In order for the above-mentioned exemption to apply to scholarships or bursaries awarded to relatives of employees, the following requirements are to be met:
- The “remuneration proxy” of the employee should not exceed R600 000 in relation to a year of assessment.
- The exemption will only apply to the extent that any scholarship or bursary awarded to an employee relative during the year of assessment does not exceed:
- R20 000 (R30 000 per year for a disabled person) in respect of Grade R to 12 as contemplated in the definition of “school” in section 1 of the South African Schools Act No 84 of 1996;
- R20 000 (R30 000 per year for a disabled person) in respect of qualification to which an NQF level from 1 up to and including 4 has been allocated in accordance with applicable South African legislation;
- R60 000 (R90 000 per year for a disabled person) in respect of qualification to which an NQF level from 5 up to and including 10 has been allocated in accordance with application South African legislation.
Where a bursary or scholarship does not fall within the ambit of the above exemption, it will be taxable in the employee’s hands.
As a bursary scheme can be implemented with virtually no cost to the employer, it has been a very attractive way to offer a reward to employees.
However, when implementing a bursary scheme employers must be aware that to qualify for the exemption various critical legal and administrative procedures must be followed to ensure that the benefit is exempt from normal tax.
It has come to the attention of the government that a number of employer bursary schemes implemented in recent years seek to reclassify ordinary remuneration as a tax-exempt bursary.
In the 2020 Budget proposals it was announced that Government proposes to close the loophole and these amendments will take effect on 1 March 2020.
Author: ELZAHNE HENN, Tax Consultant.