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The Tax Benefits of Bursaries/Scholarships for Employees

Bernard Schoeman
CA(SA), Post Graduate Diploma Accounting, BCom
The Tax Shop Head Office

The challenge for any employer is how to keep their employees happy.  There are many things an employer can consider, but, extra cash in the backpocket of any employee will always be highly rated!

Does this mean that you (as employer) necessarily need to pay your employees more?  Or, could you look at ways of helping them to receive greater after-tax income by paying for their studies or the studies of their relatives. 

Section 10(1)(q) and section 10(1)(q)(A) of the Income Tax Act provides for bursaries and scholarships to be exempt in the hands of the recipients while remaining tax deductible to the employer.  The following basic example demonstrates the benefit to an employee assuming tax rates for the year ended 28 February 2019 and assuming that he/she receives a bursary of R50,000 for their child’s education:

 

Not structured

Structured

Annual basic salary - taxable

 400,000

350,000

Annual bursary - exempt

-

50,000

Annual gross salary

400,000

400,000

Annual employees tax

 78,973

63,473

Annual savings to employee

-

15,500

It therefore makes sense to consider how you can benefit your employees or how your clients can benefit there’s.  It a worthwhile exercise to identify which employees may qualify for such exemptions.

Let’s explore further.

What are the general rules?

The rules for exempting bursaries and scholarships are laid out in the aforementioned sections of the Income Tax Act as well as Interpretation Note 66 issued by SARS in 2012 (limit amounts having been updated subsequently).  The pertinent points are summarised here:

  • Generally, any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised educational or research institution is exempt from income tax.  This is typically the case in “open” programmes where a business offers such funding to the general public. However, where such funding is only offered to employees or their relatives i.e. “closed” programmes, different rules apply as laid out below.
  • Where a bona fide scholarship or bursary is granted to an employee it will not be exempt in the hands of the employee unless the employee agrees to repay the employer if the employee fails to complete the course of study.  No repayment is necessary if the failure directly results from death, ill-health or injury.  SARS expects employees under such circumstances to have a signed agreement with their employer stipulating that the bursary or scholarship must be repaid by the employee in the event that the employee fails to complete their studies (for reasons other than death, ill-health or injury).
  • Where a bona fide scholarship or bursary is granted to a relative of an employee then exemptions are limited as follows:
    • If the employee’s remuneration is above R600,000 per annum, then the full amount of the bursary is taxable (i.e. no exempt portion) irrespective of the value of the bursary.
    • If the employee’s annual remuneration is R600,000 or less, then the first R20,000 (per annum) of the bursary is exempt if it is for basic education (up to NQF level 4) or the first R60,000 (per annum) of the bursary is exempt if it is for further education (NQF level 5-10).
    • If the bursary or scholarship is granted to an individual with a disability who is a family member of an employee who is liable for the family care and support of that individual and the employee’s annual remuneration is R600,000 or less, then the first R30,000 (per annum) of the bursary is exempt if it is for basic education (up to NQF level 4) or the first R90,000 (per annum) of the bursary is exempt if it is for further education (NQF level 5-10).

Education up to NQF level 4 is generally referred to as Basic Education while levels 5 to 10 is referred to as Further Education.  The following table summarises all the NQF qualification levels:

1 - Grade 9
2 - Grade 10 and National (vocational) Certificates level 2
3 - Grade 11 and National (vocational) Certificates level 3
4 - Grade 12 (National Senior Certificate) and National (vocational) Cert. level 4
5 - Higher Certificates and Advanced National (vocational) Cert.
6 - National Diploma and Advanced certificates
7 - Bachelor's degree, Advanced Diplomas and B-tech
8 - Honours degree, Post Graduate diploma and Professional Qualifications
9 - Master's degree
10 - Doctor's degree
 

What happens on the IRP5 of the employee?

There are 4 areas where the employer may need to record the bursary/scholarship on the payslip and IRP5 of the employee (who received the bursary on his/her behalf or for one of their relatives):

  • 3809  Bursaries or scholarships non-disabled Basic Education - taxable
  • 3815  Bursaries or scholarships non-disabled Basic Education - non taxable
  • 3820  Bursaries or scholarships non-disabled Further Education - taxable
  • 3821  Bursaries or scholarships non-disabled Further Education - non taxable
  • 3829  Bursaries or scholarships disabled person Basic Education - taxable
  • 3830  Bursaries or scholarships disabled person Basic Education - non taxable
  • 3831  Bursaries or scholarships disabled person Further Education - taxable
  • 3832  Bursaries or scholarships disabled person Further Education - non taxable

Comprehensive example 1

An employer grants a bursary of R25,000 to each of the employee’s two children in consequence of services rendered by the employee for their school education.  The employee earns an annual salary of R450,000, a bonus of R50,000 and a housing subsidy of R20,000 (i.e. total annual remuneration amounts to R520,000). As the bursary is for Basic Education (NQF levels 1 - 4) the maximum that can be exempt is R20,000 per child.  The additional portion (R5,000 x 2) is deemed taxable.  This will reflect on the employee's IRP5 as follows:

  3809 - R10,000
  3815 - R40,000

  • If the employee’s remuneration exceeds R600,000 per annum, then the full amount of both bursaries (R50,000) will be taxable and will be reflected under 3809 on the IRP5.
  • If one child was disabled then the employee would receive an exemption of R20,000 for the child who is not disabled and R30,000 for the child who is disabled.  In the above example, this would mean that R45,000 of the total bursary granted by the employer would be exempt.  On the IRP5 of the employee R5,000 would be reflected under code 3809 while R20,000 would be reflected under code 3815 and R25,000 would be reflected under code 3830. 

Comprehensive example 2

An employer grants a bursary of R70,000 to an employee’s child to study at university. The employee earns an annual total remuneration of R590,000. As the bursary is for Further Education (NQF levels 5 - 10) the maximum that can be exempt is R60,000.  The additional portion (R10,000) is deemed taxable.  This will reflect on the employee's IRP5 as follows:

  3820 - R10,000
  3821 - R60,000

  • If the employee’s remuneration exceeds R600,000 per annum, then the full amount of the bursary (R70,000) will be taxable and will be reflected under 3820 on the IRP5.
  • If the child was disabled then the employee would receive a maximum exemption of R90,000.  In the above example, this would mean that the total bursary granted by the employer would be exempt.  On the IRP5 of the employee the full amount of R70,000 will be reflected under code 3832.

For any assistance on how to structure bursaries and scholarships for your employees, please email us at enquiries@taxshop.co.za.



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More about Bernard Schoeman

Bernard is an executive director and founder of The Tax Shop Franchise.  He studied BCom majoring in information systems and accounting at the University of Cape Town and qualified as a Chartered Accountant (SA) in 1997 after completing his articles with Deloitte & Touche.  Bernard has extensive international and local experience having worked for nearly three years with financial institutions and other companies in the UK (London) and having audited numerous companies listed on the JSE in South Africa. He established a successful consulting firm and auditing firm in SA which provided excellent practical experience in dealing with various clients throughout SA and which ultimately led to the formation of The Tax Shop Franchise. He is a member of the South African Institute of Chartered Accountants.


You are invited to contact Bernard Schoeman by email at enquiries@taxshop.co.za or visit our website at www.taxshop.co.za with regards to the services The Tax Shop offers and how your business could benefit from these services. Making your life easier!