By Erich Bell, Senior Tax Consultant, BDO
The #FeesMustFall hashtag has been trending on social media for the past three months, while stories of how universities have been forced to close down campuses due to protests and the additional security costs that ensued have made – and continue to make – daily headlines. Finding a “one-size-fits-all” solution for enhancing access to tertiary education is an academic problem in its own right, the scope of which falls well beyond this article. However, there are tax incentives available to employers wanting to upskill employees, as well as to employees being upskilled. These incentives, even with their low monetary thresholds, in certain instances, could play a vital role in enhancing access to tertiary education for promising but financially constrained students. This article covers the tax incentives available.
General deduction on employees’ educational costs
The employer generally qualifies to deduct bursaries provided to employees and other training costs in terms of the general tax deduction formula. This applies in the year of assessment in which the employer actually incurs the costs.
The Income Tax Act contains a special two-part deduction for learnership agreements and apprenticeships registered with a Sector Education and Training Authority (“registered learnership agreements”). The deduction incentivises employers to train employees in a regulated environment to develop skills and create jobs. This deduction effectively allows an employer a double deduction. An employer may deduct the actual costs incurred on the registered learnership agreement and claim the learnership deduction.
The learnership deduction consists of an annual and a completion allowance. The annual allowance amounts to R30 000 for every full 12 months in which a learner is party to a registered learnership agreement. The annual allowance must be apportioned if the learnership agreement is less than 12 full months during a particular year of assessment. This would apply where the learnership agreement started or ended in the middle of the year of assessment.
On successful completion of the registered learnership agreement, the employer receives a completion allowance, which is in addition to the annual allowance and any other deductions. The quantum of the completion allowance depends on the period of the registered learnership agreement. If the registered learnership agreement was entered into for less than 24 months, the completion allowance amounts to R30 000. If the period of the registered learnership agreement equated to or exceeded 24 months, the completion allowance amounts to R30 000 for every consecutive 12 month-period falling within the learnership agreement. The R30 000 used in both cases increases by R20 000 if the learner has a “disability”, as defined.
Employers generally provide study assistance to employees through scholarships or bursaries, by reimbursing an employee’s study debts after successful completion, or by granting loans to employees which may either bear no interest or interest at a rate lower than the official rate of interest – such loans can also be waived upon successful completion of the employee’s studies.
Scholarships or bursary schemes
Employers can provide scholarships or bursaries to employees or their relatives. These could include tuition fees, registration fees, examination fees, books, equipment required for a particular field of study, accommodation, meals, and transport. The employee or relative must include bursary receipts in their gross income as follows:
- If the bursary or scholarship is paid to an employee or relative, the full amount should be included in the employee’s gross income, as it relates to services rendered by the employee; or
- If the employer settles an employee’s (or relative’s) debts relating to tuition and qualifying costs without the employee being required to reimburse the employer, the amount of settlement should be included in the employee’s gross income as a fringe benefit.
These inclusions are wholly or partially exempt if the scholarship or bursary is granted to enable or assist an employee or their relative to study at a recognised educational or research institution, and the below requirements are met. A recognised institution is one that is registered lawfully in South Africa.
A scholarship or bursary awarded to an employee is fully exempt if the employee agrees to reimburse the employer should the employee fail to complete his/her studies due to reasons other than death, ill-health or injury. The bursary or scholarship agreement should then contain such a repayment clause.
A scholarship or bursary to a relative of an employee is exempt up to certain monetary thresholds, depending on the qualification level where the employee’s annual remuneration does not exceed R250 000. If the employee’s annual remuneration exceeds R250 000, no portion of the scholarship or bursary awarded to the employee’s relative is exempt. The exemption is calculated as follows:
- R10 000 per year of assessment if the relative is in grade R to grade 12, or if the qualification is a qualification at NQF levels 1 to 4 in terms of the National Qualifications Framework Act (“the NQF Act”); and
- R30 000 per year of assessment in respect of a qualification at NQF levels 5 to 10. Reimbursing employees’ study expenses
A reward or reimbursement to an employee after successful completion of a course or qualification should be included in the employee’s gross income and does not qualify for the bursary exemption. This also applies to loans waived on successful completion of an employee’s studies. Concern regarding the anomaly between the treatment of loan write-offs and upfront bursaries was tabled with National Treasury in 2013. Treasury agreed to investigate further.
Low or no-interest loan funding
A no-interest or low-interest bearing loan granted to an employee is included as a fringe benefit in the employee’s gross income. The fringe benefit equates to the difference between the interest that would have been payable during the year of assessment if granted at the official rate of interest and the interest actually paid. A loan granted to employees to further their own studies is excluded from the ambit of fringe benefits.
The receipt of the loan capital is not included in an employee’s gross income and therefore not subject to tax. The employer would also not be subject to income tax on repayment by the employee of the loan. If the employer waives a loan provided to an employee on successful completion of the employee’s studies, the waiver amount is included in the employee’s gross income as a fringe benefit. This fringe benefit would not qualify for the bursary exemption.
Fixed-term bursaries taken over by a new employer
Many bursary schemes require bursary holders to work back an agreed period, which ensures continuity in the workforce. Failure to remain in the employment of the employer for the agreed period would usually lead to the employee having to repay a pro-rata portion of the bursary to the employer. If the new employer agreed to repay such a portion to the previous employer, it would ordinarily constitute a fringe benefit.
This rule does not apply if the employee agreed – in exchange for the new employer paying the pro-rata portion to the previous employer – to render services to the new employer for a period not less than the unexpired portion of the services that must have been rendered to the previous employer.
Although major budgetary and/or fiscal reform would be required to ensure greater access to tertiary education, it is important to take note of the existing tax incentives available for employers to upskill the workforce. These may very well partly address the tertiary education issue in South African.
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