Skip to content

South Africa: Latest tax developments regarding employer-provided scholarships and bursaries

18 August 2020
– 7 Minute Read


In February 2020, the Minister of Finance’s Budget Speech contained some announcements regarding the income tax treatment of employer-provided scholarships and bursaries (S&Bs) for relatives of employees. 

The exemption in respect of employer-provided S&Bs, both to employees and to relatives of employees, are dealt with in section 10(1)(q) of the Income Tax Act 58 of 1962 (ITA). Section 10(1)(qA) contains similar type provisions in respect of persons with disabilities.

The provision of S&Bs to relatives of employees will only qualify for an exemption where provided to employees earning less than ZAR 600 000 per year. In addition, the exemption applies only to as much of a scholarship or bursary as does not exceed ZAR 20 000 for Grades R to 12, and ZAR 60 000 for tertiary education. 

As a result, the employees benefiting from the S&Bs are not high-income earners but fall into the 18% – 39% tax brackets. The effective tax rate of the highest earners in the group is a maximum rate of 27.5%. In addition, relatives benefiting from the exemption mainly attend public educational institutions, not private institutions.

The intention as set out in the Budget Speech appeared to provide that employer-provided S&Bs to relatives of employees would not qualify for an income tax exemption if the benefit was provided as part of a cost-to-company (CTC) package (also referred to as a ‘salary sacrifice’).

Although there was no clarity as to what the proposed changes would entail, the proposal was for the changes to apply with effect from 1 March 2020. Click here to see our newsflash dated 3 March 2020 for further information in this regard.

The recently released 2020 Draft Taxation Laws Amendment Bill (Draft TLAB) now contains the proposed changes to sections 10(1)(q) and (qA), due to take effect on 1 March 2021. In terms of the proposed changes:

  • the exemption in respect of bona fide S&Bs granted by the employer to the relatives of the employee as contemplated in paragraph (ii) of the provisos to section 10(1)(q) and section 10(1)(qA), will only apply to bona fide S&Bs granted not only to relatives of employees, but in terms of an open S&B scheme available and provided to members of the general public;
  • the exemption in respect of S&Bs provided to any employee or relative of an employee, will not apply if there is an element of salary sacrifice; and
  • the employer will not qualify for a deduction in relation to S&Bs provided to relatives of employees, if they are provided on a salary sacrifice basis.

Similar proposals are included in respect of S&Bs provided to persons with disabilities. The proposals are problematic for a number of reasons. While the Budget Speech indicated changes in respect of S&Bs provided to relatives of employees, some of the proposed changes as contained in the Draft TLAB apply to S&Bs provided both to employees and to relatives of employees. 

Salary sacrifice prohibition

In terms of these proposals, S&Bs would not qualify for the exemption if they are provided as part of a CTC package. This applies not only to S&Bs provided to relatives of employees but also to S&Bs provided to employees.

Until 2006, the exemption in respect of S&Bs to employees stipulated that they may not be provided on a salary sacrifice basis. However, this requirement was deleted in 2006 and the reason for change was reflected as follows:

‘Salary sacrifice as a component of the exemption creates unnecessary difficulties in application. While justifiable as a matter of legal theory, this distinction makes little economic sense in light of the skills shortage within South Africa.’

The Explanatory Memorandum to the Draft TLAB does not refer to the ongoing skills shortage or challenges experienced by the so called ‘missing middle’ in accessing affordable quality education. 

Instead, the proposal seems to be premised on the perception that the exemption is being used as a tax planning opportunity by employers and employees, which results in a loss to the fiscus. It is not clear what the actual loss to the fiscus is, and how the ‘loss’ is split between S&Bs provided to employees and to relatives of employees respectively.

In addition, it is proposed that the employer will not be able to claim a deduction where S&Bs granted to relatives of employees are provided as part of a CTC package. It is unclear why it is thought necessary to deny the deduction if the employee is already being taxed on the benefit.

As pointed out in our previous newsflash, South Africa desperately needs to focus on affordable quality education for all youngsters. The implementation of this benefit on a salary sacrifice basis has provided some breathing space for many middle- and low-income households that struggle to afford quality education for their relatives. The reality is that this was, in most instances, only possible if provided on a salary sacrifice basis.

The implementation of the proposal as currently worded would hamper the efforts being made to foster access to affordable education, at a time when the country should increase its investment in education.

Children who currently benefit from access to a better education would be hard done by if the exemption is (effectively) withdrawn. In addition, the benefit currently facilitates the payment of school fees to (mainly) public educational institutions, thus relieving the demand on public funds by these institutions.

Surely the desired outcome should be to balance the need to protect the fiscus whilst investing in taxpayers of the future. National Treasury and SARS have in the past spoken about the need to broaden the South African tax base. Upliftment by way of access to quality education clearly assists in that endeavour.

Open S&B schemes

The proposal with regard to S&Bs provided to relatives of employees (i.e. that in addition to the CTC prohibition, such S&Bs must be granted as part of an open S&B scheme available to and provided to members of the general public in order to qualify for the exemption) is, in our view, unrealistic especially in relation to S&Bs that fund primary and secondary education. 

It is highly unlikely that an employer would, especially in the current economic climate, have the funds available to provide an open S&B scheme to learners attending primary or secondary schools.

It is further to be anticipated that an employer would not be able to claim a deduction for expenses incurred in this regard, unless the S&B is undertaken as a marketing exercise.

The argument that an open S&B scheme on tertiary level is a business expense, as the employer is incurring the expense to ensure that it will have a pick of the cream of the graduate ‘crop’ in a specific field of expertise, generally does not apply to S&Bs offered to primary and secondary school learners.

In our view, there are compelling arguments for not implementing the proposals as currently drafted in the TLAB. To the extent that there are specific anti-avoidance concerns, those concerns could and should be addressed without effectively abolishing the exemption and losing the momentum gained to date in respect of access to quality education.

As stated previously, efforts should be expended into striking a balance between the need to protect the fiscus and the very legitimate need to invest in education.