I got a call from a client. They have a business where they sell medical equipment. They want to pay for their children’s studies but show it as a bursary in the company. According to them, their children will study in a medical field and will work for th
Important:
This answer is based on tax law for the tax year ending 28 February 2018.
Answer:
The tax consequences will depend on whether or not the individuals, not the children, are employees of the ‘business’ (we accept this is a company). Section 10(1)(q) provides for an exemption of the amount 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), if the remuneration proxy derived by the employee in relation to a year of assessment exceeded R400 000 (since 1 March 2016). If the amount of the assistance exceeds the R40 000, the exemption will not apply.
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 submit that the ‘in the production of income’ requirement may prove problematic here.