[FAQ] Bursaries to a director’s relatives

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[FAQ] Bursaries to a director’s relatives

• 18 January 2021
• Individuals Tax
• The Payroll Authors Group of South Africa

Background

A taxpayer, who is also a director, employed his daughter to work for the company.

Can he offer her a bursary with an agreement that she pay the company back should she fail to complete her degree? Will this income still be exempt in the daughter’s hands or will she not quality for the exemption as she is a connected person?

Answer

The Income Tax Act

The provisions of section 10(1)(q) of the Income Tax Act does not place any limitation on the granting of a bona fide bursary where the employee of the company is a connected person to the management of the company (e.g. director, etc).

(q) any bona fide scholarship or bursary, other than any scholarship or bursary contemplated in paragraph (qA), granted to enable or assist any person to study at a recognized educational or research institution: Provided that if any such scholarship or bursary has been so granted by an employer or an associated institution (as respectively defined in paragraph 1 of the Seventh Schedule) to an employee (as defined in the said paragraph) or to a relative of such employee, the exemption under this paragraph shall not apply—

(i) in the case of a scholarship or bursary granted to so enable or assist any such employee, unless the employee agrees to reimburse the employer for any scholarship or bursary granted to that employee if that employee fails to complete his or her studies for reasons other than death, ill-health or injury;

(ii) 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 R600 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) R20 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) R60 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 No. 67 of 2008);

Application of the principles

However, it must be the policy of the company to provide bursaries to its employees in general. Please refer to SARS Interpretation Note 66 for more details.

The bona fide bursary is only exempt from normal tax, provided

• It is awarded solely on merit to any applicant and are not to any extent confined solely to any specific employee;
• The bursary is awarded to enable the employee to study at a recognised educational/research institution; and
• Certain conditions are met.

The additional conditions are dealt with in the SARS Guide for employers in respect of fringe benefits and are conditions such as reimbursing the employer if the employee failed to complete the study, etc.

If the above is not applicable, then the exemption dealt with in section 10 is not applicable and the bursary will be fully taxable.

Webinar Commentary

Further webinar commentary on Salaried Employees Fringe Benefits Series can be accessed here.

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