Bursary Exemption

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Bursary Exemption

GROUP 22 ACC2023F

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PURPOSE OF THE SECTION

The purpose of the bona fide scholarship or bursary granted section of the Income Tax Act, Section 10(1)(q) and Section 10(1)( qA ) is to provide clarity on the tax implications that may arise from any scholarship or bursary granted to enable or assist any person to study at a recognized educational or research institution,   as these tax implications on  bona fide scholarships and bursaries granted are exempt from normal tax.  The  bona fide  scholarships or bursaries are fully exempt from normal tax, provided –      • They are awarded solely on merit to any applicant and are not to any extent confined solely to employees or relatives of employees of a particular employer;    • The scholarship or bursary is awarded to enable the scholarship-holder to study at a recognized educational or research institution. The phrase “bona fide scholarship or bursary granted”;  Refers to financial aid or similar assistance granted to enable a person to study at a recognized educational or research institution. Such financial aid may be awarded with or without taking academic merit into account, and would include a grant which is, in terms of a written agreement, conditional upon the fulfillment of certain stipulated requirements. The grantee may, for example, be required to obtain a qualification within a certain period or take up employment with the grantor on completion of the course of study. .

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T he term "recognized educational or research institution” The scholarship or bursary must be granted to study at a “recognized educational or research institution”. SARS will accept that an educational or research institution qualifies as “recognized” if that institution has been established by or registered under the laws of South Africa, for example the Higher Education Act, 1997, the Skills Development Act, 1998 or the National Research Foundation Act, 1998. It will also be acceptable if a scholarship or bursary is granted to study at a foreign educational or research institution if the qualification obtained from that institution upon completion of such studies would be recognized by the South African Qualifications Authority under the National Qualifications Framework Act, 2008. In cases where the educational or research institution does not fall into one of the above categories, the local SARS office should be approached for confirmation whether or not the institution qualifies. The term “to study”  The words “to study” refer to the formal process whereby the person to whom the scholarship or bursary has been granted gains or enhances his or her knowledge, aptitude or expertise in the pursuit of learning. It is not a requirement that a degree, diploma or certificate be attained on completion of the course of study. The term “remuneration”  The word “remuneration” refers to the amounts payable by the employer to an employee for services rendered or by virtue of employment.

AUDIO-2021-04-08-19-18-48.m4a

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KEY ELEMENTS OF THE SECTION

A bona fide scholarship or bursary could include the cost of the following:  Tuition fees,  Registration fees, Examination fees , Books,  Equipment (required in that particular field of study, for example, financial or scientific calculators), Accommodation (other than the person’s home),  Meals or meal voucher/card, Transport (from residence to campus and vice versa). A direct payment of fees, for example, to a university for the purpose of an employee’s studies, is regarded as falling within the ambit of a bona fide scholarship or bursary. The exemption of a scholarship or bursary granted by the employer (or by an associated institution in relation to the employer) to the employee or to a relative of such employee is subject to the following conditions:    a) A scholarship or bursary awarded to the employee is not exempt from normal tax in the hands of the employee unless he or she agrees to reimburse his or her employer for the scholarship or bursary if he or she fails to complete his or her studies for reasons other than death, ill-health or injury. See section 10(1)(q)(i). Therefore, a bursary does not qualify for the exemption if there is no repayment clause included the agreement with the employer. b) A scholarship or bursary awarded to a relative of an employee is not exempt from normal tax in the hands of the employee if the remuneration derived by the employee during the year of assessment exceeded R100 000. The first R10 000 of a scholarship or bursary awarded during the year of assessment, where the remuneration derived by the employee during the year of assessment does not exceed R100 000, is exempt from normal tax in the hands of the employee. The R10 000 exemption limit applies to each relative of the employee who is granted a scholarship or bursary.

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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. The amount will be treated as a payment of the employee's debt, which is a taxable benefit in terms of paragraph 2(h). Paragraph 16 deems any benefit or advantage of this nature granted by the employer to the relative of such employee to be a taxable benefit in the hands of such employee. The amount will be treated as a payment of the employee's debt, which is a taxable benefit in terms of paragraph 2(h).  Persons without a disability:   In the case of a bona fide bursary or scholarship granted to a relative of the employee without a disability, the Act makes provision for the exemption from tax to apply only if the employee’s remuneration does not exceed R600 000 during the year of assessment. In addition, the amount of the bursary or scholarship will only be exempted up to a limit of R20 000 for studies from Grade R to 12, including qualifications at NQF levels 1 to 4, and R60 000 for qualifications at NQF levels 5 to 10. These levels are increased where the bursary or scholarship is made to a person with a disability. It is proposed that the exemption, in respect of a bona fide bursary or scholarship granted by the employer to the relatives of the employee, should only apply if that bona fide bursary or scholarship granted by the employer is not restricted only to the relatives of the employee, but is an open bursary or scholarship available and provided to members of the general public. Furthermore, it is proposed that the requirement that the applicability of the exemption is dependent on the fact that the employee’s remuneration package is not subject to an element of salary sacrifice, be reinstated.

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Persons with disability:  Any bona fide bursary or scholarship granted to enable or assist any person who is a person with disability as defined in section 6B(1) to study at a recognized educational or research institution may be exempt. The disability that will qualify, is a disability as defined in s6B(1). Therefore, for the employee to prove this disability, the employee MUST submit the signed ITRDD form to the employer to confirm his / her disability is as defined in section 6B(1). A person with a disability, as defined in terms of section 6B(1), is a person with a moderate to severe limitation to perform daily activities due to a physical, sensory, communication, intellectual or mental impairment which has lasted or has the prognosis of lasting for more than one year, and is diagnosed by a duly registered medical practitioner.  The exemption will not be applicable to a scholarship or bursary granted to the employee to enable or assist any such employee, who is a person with disability as defined in section 6B(1) unless the employee agrees to reimburse the employer for any scholarship or bursary granted to him/her if he/she fails to complete his/her studies for reasons other than death, ill-health or injury; or Where a scholarship or bursary is awarded to a disabled family member of the employee (who is liable for the family care and support of such a family member), the exemption will not apply to any portion of the funding amount received if the employee’s remuneration proxy exceeds R600 000. This bursary or scholarship for a family member is limited to family members whom the employee is liable for family care and support, (everything else remains applicable).

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SCENARIO 1

Nadine is a 37-year-old South African resident . Nadine is employed by Cameron’s Sports Shop (Pty) Ltd (‘CSS’), a company situated in Cape Town. In October 2020, CSS awarded Nadine’s husband with a bursary in order to study Sports Science at the University of Cape Town . The bursary agreement indicated that if he were to not complete the course, the bursary would have to be repaid to CSS . The bursary is for a one-year duration and amounted to R68 000.  Nadine’s remuneration proxy for the 2021 year of assessment amounted to R428 266 . (June 2019 Final adapted)  Required: Discuss the normal tax effects of the bursary received by her husband, on Nadine’s income for the 2021 year of assessment.  (6 marks) *Note: You must identify all the normal tax effects that apply in this scenario Please read the scenario before moving to the analysis.

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SCENARIO ANALYSIS 1

“Nadine is a South African resident” – Nadine’s worldwide income is taxable "awarded Nadine's husband" - In this case Nadine's husband is a relative of the employee. This point will affect the exemption limit and exemption amount. "bursary awarded to Nadine's husband for R68 000 for one year period" - This point highlights that there is financial assistance that has been granted, the amount of the financial assistance and the duration of the bursary. "to study Sports Science" - The purpose of the bursary awarded is to provide the individual with an opportunity to gain or enhance their knowledge, skills or abilities. The bursary awarded is in respect of the NQF 5 to 10 qualification. "at the University of Cape Town" - This is a recognized educational or research institution which was established and registered under the South African legislation.

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SCENARIO ANALYSIS 1 continued

"bursary would have to be repaid to CSS"  - If Nadine's husband does not complete his studies; Nadine will have to re-imburse CSS resulting in a loan. "remuneration proxy amounted to R428 266" - Nadine's remuneration proxy does not exceed R600 000. This point will determine the amount that will be taxed and included in her gross income, based on s10(1)(q). *Remember, the remuneration proxy must not exceed R600 000 and the bursary awarded is in respect of the 3 types of qualifications, the relative portion of the bursary will be exempt.

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SOLUTION TO SCENARIO 1

Gross Income is essential in the calculations of Normal Tax; An amount is included in the gross income if it meets the definition criteria; Nadine is a South African resident. Hence, she will be taxed on her worldwide income; An amount of R68 000 is received by Nadine’s husband in a form of bursary from her employer; The issue is whether the bursary awarded to Nadine’s husband will affect her normal tax for the 2021 year of assessment; The onus rests on Nadine to prove that her husband’s bursary is exempt from normal tax [S10 (1) (q)]; Nadine’s remuneration proxy is R428 266 for the 2021 year of assessment; Since her remuneration proxy is less than R600 000 and her husband is studying towards a qualification level that is NQF 5 and above, the first R60 000 of part of his bursary will be exempt from tax (Normal Tax); Nadine will only be taxed on the R8 000 (R68 000 – R60 000) remaining amount of her husband’s bursary; Therefore, only the last R8 000 of the bursary amount awarded to Nadine’s husband will affect her normal tax for the 2021 year of assessment.

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SCENARIO 2

Nadine is a 37-year-old South African resident . Nadine is employed by Cameron’s Sports Shop (Pty) Ltd (‘CSS’), a company situated in Cape Town. In October 2020, CSS awarded Nadine’s husband with a bursary in order to study Sports Science at the University of Cape Town . Her husband had always wanted to pursue a career in rugby until a car accident left him paraplegic . The bursary agreement indicated that if he were to not complete the course, the bursary would have to be repaid to CSS.   The bursary is for a one-year duration and amounted to R68 000 . Nadine’s remuneration proxy for the 2021 year of assessment amounted to R428 266 .

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SCENARIO ANALYSIS 2

Section 10(1)( qA ) exempts bona fide scholarships or bursaries granted to enable or assist any person who is a person with a disability to study at a recognised educational or research institution  The requirements for this exemption are the same as under s 10(1)(q) discussed in scenario 1.  Difference: Bursaries granted to a relative who is a person with a disability are subject to a higher bursary amount threshold  Nadine's husband is disabled, resulting in a higher threshold for the limit on bursary amount from 60 000 to 90 000

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SCENARIO ANALYSIS 2

Step 1: Remuneration proxy of the employee may not exceed R600 000. Step 2: Remuneration proxy must not be subject to an element of salary sacrifice Step 3: Amount of the bursary awarded to a relative during the year of assessment that is exempt, is limited to R90 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

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SOLUTION TO SCENARIO 2

All requirements of the gross income definition need to be met for an amount to be included in gross income. The onus rests on Nadine to prove that the amount is exempt The issue here is the effect of the bursary on Nadine’s normal tax for the 2021 year of assessment considering her husband was left paraplegic. Nadine is liable to receive family care and support to study because her remuneration proxy for the year is R428 266 which is less than R600 000. Her husband was studying a qualification which is NQF 5 and above , R90 000 worth of bursaries is exempt because her husband is disabled. Nadine was awarded a bursary worth R68 000 Therefore, the full bursary amount is exempt since it is less than R90 000 and will not be taxed

Audio Recording 08 Apr 2021 at 13:20:51

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TASKS

Masia, N’waitelo (msxnwa002) – Solution to Scenario 1 Maswanganyi , Nonkululeko (mswnol002) – Scenario 1 Analysis Matshikiza , Anisa (mtsani001) – Scenario 2 Analysis Matutu , Thabo (mtttha011) – Solution to Scenario 2 Mazibuko , Ofentse (mzbofe002) – Purpose of the section of the Income Tax Act Mbanjwa , Zama (mbnzam006) – Key elements of section