The ability for employees and business owners to pre-tax structure their relatives’ school and tertiary education fees remains one of the few available but seldom used tax planning opportunities.
In short, they can sacrifice a portion of their taxable income in exchange for their company’s bursary paying their education costs tax-free, thereby obtaining a tax benefit, says Darren Britz, senior tax attorney at Tax Consulting SA.
How much they save depends on the fee amount, their tax bracket and the number of learners they support, he said.
For qualifying employees, their savings range between R3,600 and R23,400 per person per annum.
With the allowed limits for employer bursaries having been recently increased, organisations are beginning to see this as a meaningful benefit to attract and retain talent.
However, Britz said that the arrangement must adhere to the letter of the law or employers could find themselves in hot water with SARS.
What is an employee bursary benefit?
In terms of the Income Tax Act 58 of 1962 as amended, a bona fide bursary or scholarship granted to an employee’s relatives shall be exempt from tax within certain limits and provided certain conditions are met.
The employee must not earn more than R600,000 for the year of assessment, and the portion of the bursary amount exceeding R20,000 for Grade R to 12 or NQF 1 to 4, or exceeding R60,000 for an NQF 5 to 10 qualification, will be subject to taxation.
When correctly augmented with the provisions for a salary sacrifice, the clause allows employees to legally reduce their taxable income in exchange for the equal but tax-free bursary benefit.
“Employers with tight budgets can increase their employee value proposition (EVP) tenfold, at virtually no cost, just by offering this reward,” said Donne Trump, bursary advisor, at Tax Consulting SA.
However, it is important to note that an employer’s payment of the school fees is a fringe benefit, as contemplated in the 7th Schedule of the Act.
Therefore, additional requirements need to be met to obtain the exemption, while critical legal and administrative procedures must be followed throughout the life of the incentive for the bursary and resulting tax reduction to be valid, Trump said.
The rise of questionable schemes
Any organisation wishing to offer such a benefit must perform the requisite due diligence and thoroughly research the requirements before taking on a partner to set up and administer the bursary, said Tax Consulting SA.
They should also ensure the programme is backed by a legal opinion that expresses its validity. “Companies shouldn’t focus on incentives marketed solely to appeal to employees,” warned Britz.
“Rather, they need a system that’s also deeply rooted in law to protect themselves so they can offer a bulletproof case if called to account by SARS.”
In contrast, the firm has noted several offerings appearing in the market whose legal grounding would not stand up to close scrutiny by the tax authority.
It is concerned that this could rob companies of a much needed means to attract, mobilise and retain vital skills.
If enough of those schemes fail, with employers left holding an unwanted tax bill, SARS and businesses alike could tar all such offerings with the same brush.
“Yet, this incentive will undoubtedly provide the competitive advantage companies are desperately seeking,” said Trump.
“It costs the employer nothing, allows employees to contribute to a need that’s important to them while lowering their tax obligation and, overall, promotes education in South Africa.”