Understanding Section 10(1)(q) of the Income Tax Act
This detailed content explains the evolution and benefits of Section 10(1)(q) of the Income Tax Act, which allows employers to provide non-taxable bursaries to employees and their relatives. By utilizing salary sacrifice, employees can assist their family members with education expenses, ultimately contributing to the development of the workforce and the nation.
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Employer Provided Bursaries Securing the future today through Section 10(1)(q) compliant Employer provided bursaries.
The driving force behind what we do Education is the great engine of personal development. It is through education that the daughter of a peasant can become a doctor, that the son of a mine worker can become the head of the mine, that a child of farmworkers can become the president of a great nation. It is what we have, not what we are given, that separates one person from another. Nelson Mandela This presentation highlights the sacrifices which parents across the country are making, from their own salaries, to educate the youth the future leaders of our great nation. Each one help one!
A History on Section 10(1)q 2006 Section 10(1)(q) of the Income Tax Act In 2006 National Treasury took decisive action to change section 10(1)(q) of the Income Tax Act to allow employers to offer bona fide bursaries to employees and their relatives in a non-taxable manner by way of a salary sacrifice. It is one of the most powerful incentives National Treasury has launched to assist education funding.
Evolution of section 10(1)q By endorsing the tax exemption as a bona fide and legal facility since 2007, National Treasury significantly increased the monetary thresholds from 2012 to 2017 to increase assistance to lower- and middle-income households, given the high cost of education. Currently, an employee that earned R600k or less in the previous tax year, can structure R20k of his/her salary as a bursary for each relative at school and R60k for each relative attending a tertiary institution. 2012 2013 2016 2017-2020 < R 600 000 R 20 000 R 60 000 Remuneration threshold Grade R 12 or NQF level 1 - 4 NQF level 5 - 10 < R 100 000 < R 250 000 R 10 000 R 30 000 < R 400 000 R 15 000 R 40 000 - R 10 000
Section 10(1)(q) of the Income Tax Act What is Section 10(1)(q) of the Income Tax Act? A Practical example An employee must earn less than R600 000 per year. This employee can voluntarily give up a part of their own salary in exchange for a non-taxable bursary for their relative. This is called salary sacrifice and is done by employees to assist their relatives who are learners and students and is offered by employers who cannot afford bursaries. Example: If someone is earning R240 000 per year and the tuition fees of their child is R20 000 for the year, then they could voluntarily sacrifice R20 00 in annual salary for a non-taxable bursary of R20 000 for their child that will be paid directly to the university by the employer. The employee then only pays tax on the remaining R220 000 of their salary. Because the R20 000 tuition fee is now a non-taxable bursary, it effectively reduces the tuition fees and commits the employee to the responsibility of paying the tuition fees.
Section 10(1)(q) of the Income Tax Act Demographics EMPLOYEE GENDER DISTRIBUTION Majority Black Women Majority Low Earners Majority Young Children Majority Young Employees Male 26% Female 74% EMPLOYEE INCOME DISTRIBUTION LEARNER AND STUDENT DISTRIBUTION EMPLOYEE AGE DISTRIBUTION NQF Level 1 - 10 6% 26 to 30 9% 46 to 55 16% More than R450 000 17% Grade R - 3 37% Grade 8 - 12 27% 31 to 35 24% 41 to 45 21% Less than R450 000 83% 36 to 40 27% Grade 4 - 7 30%
Section 10(1)(q) of the Income Tax Act Positive Impact on the Education Landscape Is section 10(1)(q) successful as an education funding initiative? Given the support from Treasury since 2006 and by increasing the monetary thresholds annually, this amazing Government initiative has enabled the private sector to already channel more than R200m towards education, positively impacting the lives of tens of thousands of employees, learners and students at all levels. SmartFunder, in particular, has helped to distribute funds to morethan 4 000 schools and tertiary educational institutions on behalf of employers across South Africa through its transparent, tax compliant and safe compliance platform. Total funds distribution Total schools and tertiary institutions that benefitted ZAR152,986,175 4,113 ZAR99,360,123 2,791 2019 2020 2019 2020
Section 10(1)(q) of the Income Tax Act Latest Proposals The latest proposal as per the TLAB released on the 28th of October 2020, has added the following paragraph to section 10(1)(q), making a bursary taxable if: (cc) 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; This will effectively close down the entire facility available in its present form, hurting the education opportunities of our children.
Section 10(1)(q) of the Income Tax Act Reason for proposed changes From public hearings by the Standing Committee on Finance (7 October) and the explanatory memorandum by Treasury it is stated that Government is worried about a loss to the fiscus as well as potential abuse of some employer bursary schemes The extent of the loss to the fiscus was not discussed in the reply by Treasury at its reply to the Standing Committee on Finance (13 October) neither indeed was the extent of the benefits of the facility to South African students and their futures. In the 2019 calendar year, the loss to the fiscus due to salary sacrifice, for all 200+ companies that we are the compliance partner for, was only R11.5m, assisting 3 037 learners.
Section 10(1)(q) of the Income Tax Act Consequences of proposed changes As a bursary administrator for more than 200 of these employer provided bursary schemes, we can confirm the following: The beneficiaries are majority low earning black women. If the proposed amendment gets passed in its current form, these children will be impacted in a negative way as the source of funding for their education will be impacted significantly. Is there not an alternative way to address concerns?
Section 10(1)(q) of the Income Tax Act Why have mitigating measures not been considered? Although the issue of abuse was mentioned by Treasury at its reply to the Standing Committee on Finance on 13 October, the extent of the abuse has still been left unanswered and solutions were not offered to mitigate abuse. Smartfunder uses two mechanisms that are not currently required by the Tax Act, but which mitigate abuse: Verification that the recipient, the Educational Institution, is registered with the Department of Education and that the relative is actively enrolled. Direct payments from the Employer to the Educational Institution, not allowing for any reimbursements to the employee. It is clear that these two components significantly mitigate abuse and ensures responsible use of funds being made available for bursaries as is detailed in the next slide.
Section 10(1)(q) of the Income Tax Act Further practical evidence Further evidence: Only 8 052 employees are utilising this out of more than 200 Employers using SmartFunder as compliance partner. This translates to only 40 employees per company. Only 1.36 relatives on average per employee are applied for (compared to a much higher national average, so no evidence of abuse); More than 90% of relatives being a daughter or son (this means that it is not being abused for tax planning purposes as extended family are making up a very small portion, so no evidence of abuse);
Section 10(1)(q) of the Income Tax Act Recommendation based on evidence We recommend that instead of closing down the whole incentive, that these two requirements rather be included as part of the legislation That only educational institutions registered with the department of education may receive payments That employers be required to pay the educational institutions directly This will ensure compliance and significantly reduce the effort required by SARS to police this as the flow of funds will then take the same format as medical aid and retirement products and IRP5 codes have already been released for this.
Section 10(1)(q) of the Income Tax Act In summary National Treasury took decisive action to make this incentive possible in 2006. Further steps were taken annually by National Treasury from 2007 2017 to increase monetary thresholds to encourage greater uptake. The consequence of the closure of the initiative has significant implications given the demographic of the beneficiaries. The incentive is achieving EXACTLY what it was set out to do. It is transformative and supports a vulnerable sector of our population, being lower-income black women. Instead of closing down the present facility effectively, consideration was not paid to the possibility of firming up legislation to prevent any abuse and to ensure compliance. It would appear to us to be worthy of serious consideration. THANK YOU
