Structuring taxes to pay education fees has its benefits, and risks

The margins for employer bursaries in South Africa have been widened recently, which has presented a substantial opportunity for businesses across the country to attract talent via tax planning structures, according to senior analysts at Tax Consulting South Africa. Such a strategy would not be without its risks.

Bursaries allow employees in South Africa to forfeit a part of their taxable income to their company, in return for which the employers will take responsibility for covering education fees that might arise for any members of an employee’s family, without the burden of taxation.

The scheme allows a certain degree of saving from both parties, according to Senior Tax Attorney at Tax Consulting SA Darren Britz. Depending on the sum of tuition, the salary and the number of people for which education is being covered, savings could be anywhere between R3,600 and R23,400.

Such opportunities are likely to gain popularity, particularly in the South African economy, where steady hikes in tax rates have led many to come under financial pressure in recent times. The government is currently engaged in a number of tax reforms, most of which are aimed at increasing the revenue pool.

The limits have recently been widened, which creates the opportunity to better exploit this opportunity. “Employers with tight budgets can increase their employee value proposition (EVP) tenfold, at virtually no cost, just by offering this reward,” explains Donne Trump, Bursary Advisor at Tax Consulting SA.

However, the utilisation of bursary schemes is regulated by detailed guidelines. For instance, the scheme should not be applied in cases where the employee earns in excess of R600,000 for the taxation period. Other restrictions include mandatory due diligence on the parties involved.

Darren Britz recommends that such schemes be finalised under a legal eye. “Companies shouldn’t focus on incentives marketed solely to appeal to employees. Rather, they need a system that’s also deeply rooted in law to protect themselves so they can offer a bulletproof case if called to account by SARS,” he said.

“Yet, this incentive will undoubtedly provide the competitive advantage companies are desperately seeking. It costs the employer nothing, allows employees to contribute to a need that’s important to them while lowering their tax obligation and, overall, promotes education in South Africa,” added Trump.