1. WHETHER THE PERSON WHO RECEIVES A BURSARY (SEE BELOW) WILL BE TAXED ON THE AMOUNT. 2. WHETHER THE ENTITY PAYING THE BURSARY (SEE BELOW) WILL BE ABLE TO DEDUCT IT FROM THEIR TAXABLE INCOME?
Important:
This answer is based on tax law for the tax year ending 28 February 2017.
Answer:
Section 10(1)(q) exempts from normal tax any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised educational or research institution.
Where, however, the scholarship or bursary has been granted by an employer or associated institution (as defined in paragraph 1 of the Seventh Schedule) to a relative of an employee, the exemption under section 10(1)(q) does not apply (in the case of a scholarship or bursary granted to enable or assist any such relative of an employee so to study):
(aa) if the remuneration proxy derived by the employee in relation to a year of assessment exceeded R250 000; and
(bb) to so much of any scholarship or bursary contemplated in this subparagraph as in the case of any such relative, during the year of assessment, exceeds—
(A)R10 000 in respect of—
(AA) grade R to grade twelve as contemplated in the definition of ‘school’ in section 1 of the South African Schools Act, 1996 (Act No. 84 of 1996); or
(BB) a qualification to which an NQF level from 1 up to and including 4 has been allocated in accordance with Chapter 2 of the National Qualifications Framework Act, 2008 (Act No. 67 of 2008); and
(B) R30 000 in respect of a qualification to which an NQF level from 5 up to and including 10 has been allocated in accordance with Chapter 2 of the National Qualifications Framework Act, 2008 (Act 67 of 2008);
To the extent that the scholarships or bursaries granted to the relatives of the employee are not exempt from normal tax in terms of section (10)(1)(q)(ii), the scholarships or bursaries will be subject to normal tax in the hands of the employee. This is in accordance with the current practice prevailing, but we agree with the view.
The following guidance is relevant to the issue of whether a deduction can be made.
The Tax Administration Act (not SARS) provides that the “taxpayer bears the burden of proving:
(a) that an amount, transaction, event or item is exempt or otherwise not taxable;
(b) that an amount or item is deductible …”
Judge Conradie in Warner Lambert (SA) v CSARS stated the law in this regard when he said “Deductible expenditure has certain characteristics: it must be incurred in the production of income (s 11(a)) and will not be allowed as a deduction against gross income if it is not laid out or expended for the purposes of trade.”
The crucial requirement of section 11(a) is that deductions are only allowed, for the purpose of determining the taxable income derived by any person from the income of that person derived from carrying on any trade.
Whilst the bursary may be of a capital nature for the individual concerned, it may well not be capital in nature for the company making the payment. We agree with you that the ‘in the production of income’ requirement may prove problematic here. We don’t know what the purposes of the expense is and can’t comment on that.