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Income Tax Act, 1962 (Act 58 of 1962)

Department of Finance

Practice Note No. 17

Taxation Implications of Bursaries and Scholarships (applies from commencement of years of assessment ended or ending on or after 1 January 1992 unless otherwise indicated)

 

 

Date: 12 March 1993

 

1. Statutory Provisions

1.1 Section 10(1)(q), which was added to the Income Tax Act, 1962 (the Act), by section 10(1)(p) of the Income Tax Act, 1992, provides for the exemption from income tax of any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised educational or research institution subject to the following conditions:

If such scholarship or bursary has been granted by an employer or an associated institution (as defined in paragraph 1 of the Seventh Schedule to the Act) to an employee (as defined in the said paragraph) or to a relative of such employee in circumstances indicating that the scholarship or bursary would not have been granted had that employee not been an employee of that employer, the exemption shall not apply—

i) if any remuneration to which the employee was entitled or might in the future have become entitled was in any manner whatsoever reduced or forfeited as a result of the grant of such scholarship or bursary, i.e. a salary sacrifice,
ii) in the case of a scholarship or bursary granted to enable or assist any such relative of any employee so to study, if the remuneration derived by the employee during the year of assessment exceeds R36 000; and
iii) to so much of any scholarship or bursary contemplated in paragraph (ii) as in the case of such relative exceeds R1 200 during the year of assessment.

 

1.2 Where a scholarship or bursary is granted subject to a salary sacrifice [paragraph 1.1 (i)], section 23(j) [which was inserted in the Act at the same time as section 10(1)(q)] provides that where a taxpayer is an "employer" or "associated institution" (as respectively defined in the Seventh Schedule to the Act) no deduction will be made in respect of the cost to the taxpayer of providing such scholarship or bursary. (See also paragraph 4.2.)

 

2. Interpretation of Words and Phrases

2.1 "Bona tide scholarship or bursary" refers to financial or other assistance granted to a person to enable him to study at a recognised educational or research institution. It would include a grant which is in terms of a written agreement conditional on the fulfillment of stipulated requirements; for example, the grantee is required to obtain a qualification or take up employment with the grantor on completion of the course of study.
2.1.1 The grant must be made to enable the grantee to pursue a course of study for the purpose of gaining or expanding his knowledge, intellect or skills.
2.1.2 A reward or reimbursement of study expenses (borne by a person) after completion of his studies does not constitute a scholarship or bursary as the grant must have been made to enable or assist the grantee to study.
2.1.3 The tax position relative to scholarships; bursaries and study loans is dealt with in paragraph 4 of this Practice Note.
2.1.4 A direct payment of fees, for example to a university, for the purpose of an employee's studies is regarded as falling within the ambit of a scholarship, bursary or grant.

 

2.2 "A recognised educational or research institution" comprehends a "college" or "university" as defined in section 18A of the Act, or a school or any other educational or research institution wheresoever situated which is of a permanent nature, open to the public generally and offering a range of practical and academic courses.

 

2.3 "To study" relates to the formal process whereby the person to whom the scholarship or bursary has been granted gains or enhances his knowledge, intellect or expertise. It is not a requirement that a degree, diploma or certificate be awarded on completion of the course of study.
2.3.1 Where research is undertaken by a person for the benefit of another person, for example, an employer, a business or sponsor, the relevant expenditure incurred by the employer, business or sponsor for the purposes of such research will not constitute a bona fide scholarship or bursary granted to enable or assist the researcher to study. See paragraph 4.2.3 for the tax implications.
2.3.2 A scholarship or bursary granted to a visiting academic for the purpose of lecturing students does not satisfy the study requirement as the object of the grant will be to impart and not to gain knowledge.

 

2.4 "Remuneration" means remuneration as defined in the Fourth Schedule to the Act. This also applies to any amounts paid to directors of private companies for the purposes of this exemption.

 

3. Closed and Open Scholarships or Bursaries

For the purpose of the exemption scholarships and bursaries may be categorised as open or closed.

 

3.1 Open scholarships or bursaries

These are scholarships or bursaries which are competed for by, or are awarded on merit (academic or otherwise) to, anyone applying therefor and are not, to any extent, confined to the employees or relatives of employees of a particular employer, organisation or other institution.

 

3.2 Closed scholarships or bursaries

These are scholarships or bursaries which are confined to employees, or -relatives of employees, of an employer or an associated institution.

 

Both scholarships or bursaries under 3.1 and 3.2 may be subject to a condition that, upon completion of his studies, the scholarship holder or bursar take up employment with the grantor or repay the scholarship or bursary ii he abandons his studies or fails to complete them with a specified period.

 

4. Tax Implications

4.1 Open scholarships or bursaries are fully exempt from tax if they are bona fide awarded to enable the scholarship-holder or bursar to study at a recognised educational or research institution. However, where an employee or relative of an employee is awarded a scholarship or bursary under an open scheme and such award is, for example, subject to a salary sacrifice, the exemption under section 10(1)(q) will not apply as the scholarship or bursary will not have been bona fide granted. The exemption will also not apply as there is an express proviso to preclude an exemption when there is a salary sacrifice.

 

4.2 Closed scholarships or bursaries granted to an employee or relative of an employee that are subject to a present or future salary sacrifice by the employee [see paragraph 1.1 (ill are not exempt from tax. Moreover, in terms of section 23(j) of the Act the employer is not entitled to a deduction in respect of the cost of such scholarship or bursary. If there is no salary sacrifice the scholarship or bursary awarded to an employee will be exempt from tax and the provisions of section 23(j) will not apply.
4.2.1 Where a scholarship or bursary is awarded to a relative of an employee and there is no present or future salary sacrifice by the employee and the remuneration derived by the employee during the year of assessment does not exceed R36 000, an amount of so much of the scholarship or bursary as does not exceed R1 200 is exempt from tax. The R1 200 exemption limit applies to each relative of the employee who is granted a scholarship or bursary.
4.2.2 Scholarships or bursaries granted under a closed scheme to a relative of a retired or deceased employee will be subject to the limitations referred to in paragraph 4.2.1 if they were granted prior to the employee's retirement or demise. Where they are granted Or paid after one of those events has occurred they will be treated as if they had been granted under an open scheme (see Paragraph 4.1) unless an agreement was entered into prior to an employee's retirement between the employee and the employer in terms of which the employer will provide a scholarship or bursary for a relative of the employee subsequent to the employee's retirement.
4.2.3 Where a person undertakes research for the benefit of another person (see paragraph 2.3.1) the payment received in this regard by the first-mentioned person will be taxed as income in his hands and he will not quality for the exemption under section 10(1)(q). The person paying the amount will qualify for a deduction subject to the provisions of sections 11(a) and 23 of the Act.

 

4.3 Any recoupment which arises in respect of a scholarship or bursary granted by a taxpayer, where the amount of the scholarship or bursary has been allowed as a deduction against the income of such taxpayer will, in terms of section 8(4)(a) of the Act, be included in the taxpayer's income in the year of assessment when recouped.

 

4.4 Studyloans
4.4.1 A loan does not constitute income for tax purposes and is, therefore, not taxable. Personal study loans obtained from a financial institution or from any other source unrelated to employment are not taken into consideration for purposes of section 10(1)(q) of the Act, nor are study expenses incurred by the holder of the loan, including the interest payable thereon, deductible from the income of the borrower. Such privately-funded loans, are, therefore, neither taxable nor tax deductible.
4.4.2 In terms of paragraph 11(4)(b) of the Seventh Schedule to the Act no value is placed on a taxable benefit derived by an employee in consequence of the grant by any employer of a loan for the purpose of enabling that employee to further his own studies.
4.4.3 Any scholarship or bursary which is granted subject to repayment due to non-fulfillment of conditions stipulated in a written agreement will be treated as a bona fide scholarship or bursary as indicated in paragraphs 4.1 to 4.2.2 until such time as the non-compliance provisions of the agreement are invoked. In the year of assessment in which such provisions are invoked the amount or amounts of the scholarship or bursary will be regarded as a loan and, if relevant, 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 to the Act and not qualify for the exemption contained in paragraph 11(4)(b) of the Seventh Schedule to the Act as such loan was not granted to enable the employee to study.
4.4.4 Where an employee who had obtained a loan from his employer to enable him to study is absolved from repaying the loan, he will have received a taxable benefit in terms of paragraph 2(h) of the Seventh Schedule to the Act.

 

4.5 Reimbursement of study expenses

Where, as mentioned in paragraph 2.1.2, an employer rewards an employee for a qualification or for having successfully completed a course of studies, or reimburses him for study expenses borne by him, 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 expenses, a taxable benefit in terms of paragraph 2(h) of the Seventh Schedule to the Act.

 

4.6 Taxable scholarships or bursaries granted to employees and relatives of employees

These arise under the following circumstances:

i) The employee sacrifices a part of his present or future remuneration in order to obtain a scholarship or bursary for himself or for a relative.
ii) Where, under a closed scheme, an award is made to a relative of an employee and the employee's remuneration exceeds R36 000 per annum.
iii) Where, under a close scheme, an award is made to a relative of an employee whose remuneration is less than R36 000 per annum but the award exceeds R1 200 per annum in the case of any relative (i.e. the amount exceeding R1 200 per relative per annum will be taxable).

To the extent that the scholarships or bursaries referred to above are not exempt from tax under section 10(1)(q) of the Act they will be taxable in the hands of the employee.

 

5. Study Loans etc. taken over by New Employer

5.1 Where—
i) in consideration for the grant by any employer (referred to as the former employer) to an employee of any bursary, study loan or similar assistance, the employee assumed an obligation to render services to the former employer for an agreed period;
ii) in consequence of the employee having terminated his services with the former employer before the expiry of the said period and having taken up employment with another employer (referred to as the present employer), the employee thereupon became liable to pay an amount to the former employer;
iii) such amount was paid to the former employer on the employee's behalf by the present employer; and
iv) the employee has in consideration for such payment by the present employer assumed an obligation to render services to the present employer for a period which i is not shorter than the unexpired portion of the period during which he had been obliged to render services to the former employer,

no value will be placed on the value of any taxable benefit to the employee derived by reason of the payment referred to in item (iii) and consequently the payment by the present employer to the former employer will not be a taxable benefit under the Seventh Schedule to the Act.

 

5.2 These provisions operate with effect from the 1991 year of assessment. The amount so refunded, if allowed as a deduction to the former employer, will be taxable as a recoupment in the hands of such former employer.

 

6. Other Forms Of Study Assistance

6.1 Specialised Training Courses
6.1.1 Expenditure in connection with in-house or on-the-job training or courses presented by other undertakings for or on behalf of employers does not represent a taxable benefit in the hands of the employees of the employer if the training is job-related and ultimately for the employer's benefit. The tape of training envisaged under this heading could include the following:
i) Computer and word processing courses.
ii) Management and administration courses.
iii) Bookkeeping courses.
iv) Sales courses.
v) Courses in operating office and technical equipment.
vi) Language courses for employees whose home language is not one of the official languages.
vii) Public relations courses.
viii) In-house courses presented by banks, building societies and insurance companies for their employees.

This list is not exhaustive and in cases of doubt the local Receiver of Revenue should be consulted in the first instance.

6.1.2 Training, research and education of the nature described above must be distinguished from professional and formal education resulting in qualifications attaching to the person of an employee. Where admission to a particular profession or the ability to perform certain specialised duties is dependent on an employee obtaining an appropriate qualification and the employer meets the employee's costs of obtaining the required qualification, which costs would normally be borne by the employee himself, the employee will, subject to the provisions of section 10(1)(q) and the relevant paragraphs of this Practice Note, be regarded as having received a taxable benefit.
6.1.3 If in terms of a law such as the Manpower Training Act, No 56 of 1981, an employer is required to pay the fees payable in respect of prescribed classes or courses attended by his employees or to refund such fees paid by them, the fees will not constitute a taxable benefit in the employees' hands. The employer will qualify for a deduction in respect of these payments in terms of section 11(a) of the Act.

 

6.2 Remission of study fees by virtue of employment (teachers, lecturers and their relatives)

It is common practice for certain educational institutions, notably  universities, to allow their employees and such employees' close relatives to study free of charge or at greatly reduced fees at these institutions. While the marginal cost of the education of such employees and their relatives represents a taxable benefit under the Seventh Schedule to the Act, the exemption under section 10(1)(q) will apply subject to the limitations provided for. See paragraphs 4.2 to 4.2.2 of this Practice Note.

 

7. Receiver of Revenue

Where the circumstances of a particular case are not covered by this Practice Note or there is uncertainty, the matter should be taken up with the local Receiver of Revenue citing full details.

 

8. PAYE

Book 1 (Instructions and Guidelines on PAYE and Site) of the IRP 10 Tax Deduction Tables contains instructions relating to the employees tax position of taxable scholarships, bursaries, study loans and fringe benefits relative thereto and the duties of employers in this regard.