National Treasury’s concerns about several tax schemes in respect of bursaries and scholarships granted to the relatives of employees by their employers have led to a change in the way the bursaries will be taxed from next year.
Treasury initially proposed several amendments to tackle the perceived abuse of tax-exempt bursaries that could effectively have shut down both bursaries to employees and bursaries to the relatives of employees.
After extensive consultation with the industry the tax exemption on bona fide bursaries by employers to employees will remain as is, says Beatrie Gouws, head of stakeholder management and strategic development at the South African Institute of Tax Professionals (Sait).
However, from March 1, 2021 Treasury proposes that employees who are getting a bursary through a salary sacrifice mechanism for a relative no longer receive it tax-free.
If the employer had a structure where the employee sacrifices an amount of their salary to pay the tuition fees for their children, or brother or nephew, it will no longer be from pre-tax remuneration but after-tax remuneration. The employer will still get a tax deduction.
If there is no salary sacrifice on the part of the employee the bursary will be tax-exempt.
The provision of employer-provided bursaries or scholarships to employees has been an exempt benefit for many years. The exemption initially stated that it could not be provided on a salary sacrifice basis, but in 2006 the prohibition was removed.
In smaller companies that are not able to afford a full bursary, the employee may be required to carry a portion of the cost themselves, placing them at a disadvantage to employees at larger companies that could afford to offer full bursaries.
Sait, in its submission to Treasury, argued against the reinstatement of the salary sacrifice prohibition to bursaries offered to the relatives of employees. The institute says the incentive based on a salary sacrifice has provided some breathing space for many middle and low-income earners who struggle to afford quality education for their relatives. However, Sait’s argument was not accepted by Treasury.
Gouws says the compliance process to qualify for a tax exemption on bursaries to the relatives of employees is administratively complex and costly.
The exemption is available to employees who earn R600 000 or less per annum and the value of the bursaries is capped at R20 000 for primary education and R60 000 for tertiary education.
Several institutions stepped in and developed schemes to ensure administrative compliance on behalf of employers who use the salary sacrifice mechanism.
“However, some of the schemes were not entirely compliant and used the incentive to rip the fiscus off,” says Gouws.
“They used pre-tax money to fund private expenditure. There were some very good schemes and some bad ones, let me put it that way.”
Treasury, in its presentation to the Standing Committee on Finance on the Taxation Laws Amendment Bill, says the schemes were developed by entities other than the employer and then marketed to the employer. They in effect reclassified ordinary taxable remuneration as a tax-exempt bursary granted to the relatives of employees that is used as pre-tax money to fund private expenditure.
Initially, Treasury proposed that the exemption in respect of a bona fide bursary or scholarship granted to the relatives of the employee should only apply if the bursary or scholarship is not restricted to the relatives of the employees, but is an open bursary available to members of the general public.
Industry commentators said the requirement was restrictive and extremely costly for employers (especially considering the impacts of the current Covid pandemic). They argued that the loss to the fiscus is minimal considering the benefit arising from the current legislation.
Treasury accepted the argument and said changes will be made to the draft Amendment Bill to remove the requirement that bursaries to relatives of employees shall only be exempt if it is an open bursary available to members of the general public.
“As a result the tax-exempt status will not be dependent on whether or not the bursary is open to members of the general public,” Treasury said in response.