EMPLOYER-PROVIDED BURSARIES AND SCHOLARSHIPS TO RELATIVES: STILL TAX EXEMPT?

The Minister of Finance’s Budget Speech last week was widely welcomed from a tax perspective, as it did not include the onerous increases predicted by many advisors.  However, there was an announcement regarding employer-provided scholarships or bursaries which has created substantial confusion and uncertainty.
 
The provision of scholarships or bursaries to relatives of employees as an exempt benefit has in recent years become a great planning opportunity, especially since the section was amended to extend the benefit to primary and secondary education.  The exemption is designed not to benefit high-income earners, as employees only qualify for this benefit if their remuneration for the year does not exceed ZAR 60 000.  The exemption also only applies to so 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.
 
It is very common for employers to remunerate employees on a cost-to-company (CTC) basis, which provides for all payments or benefits to be included in their CTC.  Any non-cash benefits (such as scholarships or bursaries) reduce the cash component of the employee’s CTC package.
 
Most employers do not have (and cannot afford) a separate bursary scheme for relatives of employees. However, for employees with CTC packages, it is possible to restructure their remuneration packages for their CTCs to include the exempt scholarship(s) or bursary(ies), thus reducing their taxable income.  This form of restructure is often referred to as a ‘salary sacrifice’.
 
It is of paramount importance to ensure that such a restructure is correctly implemented – a poorly implemented restructure could result in the employee still being taxed on the value of the scholarship or bursary. However, a restructure where it is clear that the employee does not first receive a taxable salary before exchanging it for the non-taxable benefit, results in reduced income tax for the employee.   
 
The following Budget Speech comment raised alarm bells in this regard, especially considering the proposed effective date:
 
'Addressing an anomaly in the tax exemption of employer-provided bursaries: A number of employer bursary schemes seek to reclassify ordinary remuneration as a tax-exempt bursary granted to the dependants of an employee.  Government proposes to close this loophole.  These amendments will take effect on
1 March 2020.'
 
No legislative amendments have been proposed yet, which is very concerning in light of the effective date of 1 March – which has already passed! This creates a substantial problem for employers who currently have exempt scholarships and bursaries as part of their CTC packages. 

Although the comment does not specifically refer to the salary sacrifice concept, it seems to be the logical conclusion that the proposal targets salary sacrifice structures. It is not clear whether the comment refers to all forms of salary sacrifice, or only to poorly implemented restructures.
 
The Budget Speech refers to this as an ‘anomaly’, but this makes no sense in light of the fact that the relevant provisions were expressly amended in 2006 to allow a salary sacrifice. At this time, the exemption has not yet been expanded to provide for scholarships to also be provided from Grade R upwards.

However, South Africa desperately needs to focus on 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. It would be illogical and counter-productive to attempt to limit this benefit to those instances where it is not provided on a salary sacrifice basis. 
 
What does this mean for employers who are currently providing this benefit to employees on a salary sacrifice basis? More importantly, should they start withholding PAYE from the end of March? Unfortunately, there are no easy answers to this question and all employers who could be impacted by the proposed change are encouraged to obtain advice in this regard as a matter of urgency. For employees, this could mean the end of one of their very few remaining tax benefits.