Employees and their relatives who were awarded scholarships and bursaries benefited
from a tax exemption since 2006, but this programme became the subject of controversy
in 2020. Read more in our article about a perceived false salary sacrifice for deadweight
loss education and the legislative amendments passed in 2020 to curb the perceived
abuse.

Section 10 of the Income Tax Act exempts certain receipts and accruals from normal tax (e.g.,
income tax on individuals and companies). One such exemption is contained in section 10(1)(q)
which exempts any bona fide bursary or scholarship that is granted to assist or enable any
person to study at a recognised educational or research institution.

A history of the section 10(1)(q) programme Section 10(1)(q) was first introduced in 1992 and
excluded any bursary or scholarship granted to an employee where the employee’s salary
package was subject to an element of salary sacrifice. In this regard, the Explanatory
Memorandum on the Income Tax Bill, 1992, reads as follows: “Where the bursary is granted to
an employee due to services rendered and the grant is linked to a reduction or forfeiture of any
remuneration to which the employee is entitled or may become entitled, this exemption will not
apply. Any bona fide bursary which is granted to an employee where there is no associated
reduction or forfeiture in remuneration, will therefore not be taxable.”

In short, salary sacrifice occurs when an employee reduces his or her taxable income for an
equivalent, but tax-free, benefit.

In 2006 SARS announced that drawing a distinction between bursaries and scholarships that
were and were not subject to an element of salary sacrifice was too cumbersome. It was further
announced that skills development was to be prioritised and that, as a result, the element of
salary sacrifice was to be removed from the ambit of section 10(1)(q). To this end, it was
determined that employee bursaries and scholarships will remain exempt, subject to the
requirements that funds are used exclusively for tuition are:
 

• A bursary or scholarship is granted to an employee to assist them with their studies and

that employee undertakes to repay their employer should they not comply with the
requisite bursary and scholarship obligations.
 

• A bursary or scholarship is granted to the relative of an employee if:

• The employee receives a “remuneration proxy” not exceeding the threshold set

by Treasury (currently R600 000) in a year of assessment.

• The bursary or scholarship awarded does not exceed R20 000 in respect of

Grades R to 12; R20 000 in respect of a qualification at NQF level from 1 to 4; or
R60 000 in respect of a qualification at NQF level from 5 up to and including 10

As such, this tax exemption existed regardless of whether or not the bursary or scholarship was
coupled with an element of salary sacrifice. Furthermore, in the 2006 tax amendments, section
23(j) of the Income Tax Act, which made salary sacrifice payments by employers non-deductible
for the employers, was deleted.

The aforementioned amendments to sections 10(1)(q) and 23(j) made this arrangement
attractive for employees, who were able to reduce their tax liabilities, as well as to employers
who were able to deduct these expenses from their taxable income. This employer–employee
benefit was further boosted as a result of the 2015 #FeesMustFall movement, which saw an
increased governmental commitment to broadening access to education. In the 2016 Budget
Speech, the Minister of Finance emphasised the need to “continuously improve our education
and health systems” and “support skills development”. It was against this backdrop that the
qualifying income threshold for the employees increased from R250 000 to R400 000 per annum.

This was further increased in 2017 to R600 000. This second increase is of significance since it
reflects the amount associated with the “missing middle”, as established by the Department of
Higher Education and Training. The “missing middle” are those who are too poor to afford
university themselves, but not poor enough to be eligible for government funding. Hence, section
10(1)(q) is a critical tool available to this group.

Government concerns and the most recent amendment to section 10(1)(q)
Treasury noted that section 10(1)(q) was being over utilised by employers and employees,
thereby burdening the fiscus. In the Explanatory Memorandum to the 2020 Draft Taxation Laws
Amendment Bill (Draft TLAB), Treasury explained that, more often than not, schemes were
developed by external institutions and marketed to the employers as a means of providing tax-
exempt bursaries and scholarships to the relatives of employees at no additional cost to the
employer. Furthermore, as the employee funded their relatives’ studies by way of a salary
sacrifice, the schemes merely reclassified employees’ income as a tax-exempt bursary and
scholarship granted to the relatives of employees.

To this end, Treasury announced that, with effect from 1 March 2021, section 10(1)(q) will revert
to its original 1992 form and no longer exempt bursaries and scholarships that are subject to an
element of salary sacrifice. Initially in the 2020 Draft TLAB, it was proposed that the exemption
would only be available if the bursary or scholarship was not restricted to employees and their
relatives, but rather an open bursary and scholarship scheme available to all members of the
public. After public consultation, however, it was determined that this requirement would be
costly and burdensome on employers and was accordingly abandoned in the final version.

The revised version of section10(1)(q) stipulates that a bursary or scholarship will not qualify as
an exemption if “any remuneration to which the employee was entitled or might in the future have
become entitled was in any manner whatsoever reduced or forfeited as a result of the grant of
such scholarship or bursary”. In this regard, bursaries and scholarships subject to an element of
salary sacrifice are, once again, no longer exempt under section 10(1)(q).

It must be noted that, unlike the 1992 version, the employer deduction in relation to bursaries and
scholarships that are subject to salary sacrifice is still permitted.

Concerns about the section 10(1)(q) amendment
The current amendment to section 10(1)(q) is riddled with socioeconomic challenges. Many
government sectors, including Treasury, have emphasised that education is a critical tool through
which the government can alleviate poverty and improve our disheartening socioeconomic
circumstances.

In light of the high cost of education and skills shortages facing South Africa, limiting the
opportunity for residents to acquire an education is short-sighted. Broadening access to
education will enlarge the future tax base by equipping residents with the necessary education,
skills and training to enter the job market. Consequently, limiting the education opportunities
available to future taxpayers is counter-intuitive.

Middle-income employees have relied on this exemption to empower themselves and their
relatives with an education. This amendment may hamper the attempts being made to advance
access to affordable education at a time when investment in education is essential.

Furthermore, while the amendment is premised on the “loss to the fiscus”, it has not been made
clear what the actual loss is.

While there may be valid apprehensions regarding avoidance, these concerns could, and should,
be quelled without slowing the momentum gained in relation to funding education.

While employers can still use this incentive to encourage and facilitate education, its use will not
be as widespread. This is because, previously, the employer was able to set off the cost of the
bursary and scholarship against the salary of the qualifying employee. This is no longer the case
as the expense of any bursary and scholarship awarded will only come as a cost to the employer
or, alternatively, the employee will be liable for the tax levied thereon.

It is critical that consideration be given to striking a balance between the need to protect the
fiscus and the equally important need to foster investment in education.