One of the common issues raised by many education institutions in South Africa is the lack of sufficient funding.
In this document, we explore the impact of tax on the financial sustainability of higher education institutions, focusing on Value-Added-Tax and Employees Tax.
Historic Challenges with tax compliance
Educational services are an exempt supply under section 12(h) of the Value-Added Tax Act, 89 of 1991 (the "VAT Act"). The main reason for the exemption of educational services is that many of the institutions are government institutions and, to some extent, financed by the Government. When Value-Added Tax (VAT) was introduced in 1991, legislation that specified the boundaries of primary, secondary, and higher education was not in place.
It was difficult to distinguish between the various educational spheres. As a result, the Value-Added Tax Committee (VATCOM), appointed by the Minister of Finance, recommended that the supply of educational services be exempt from VAT, as the previous sales tax treatment. The exemption aimed to alleviate the financial burden and additional risks and compliance costs associated with VAT accounting and compliance. However, institutions providing educational services have changed drastically over the years, and a reduced number of institutions are wholly subsidised in terms of government subsidies.
These institutions have increased their taxable activities considerably to aid government grants and increase income. Furthermore, privately-owned and semi-subsidised institutions are accountable for their own costs and are not provided with any or limited support from Government.
As the term educational services is not defined in either the VAT Act or in the various Acts referenced in section 12(h), it remains an argument on how educational services can be termed or defined in terms of what they include. Thus, while "educational services" have not been defined explicitly in the VAT Act, it is nevertheless clear that services covered by the referenced Acts, are included in the definition. If the taxable supplies of an educational institution exceed R1 million per annum, they will be obliged to register for VAT and declare output tax on their taxable supplies. No VAT is charged on exempt supplies made by organisations.
They cannot claim input tax credits on their purchases, or only a portion is recoverable through the application of an apportionment ratio. The exemption details are complex for educational institutions, and the mixture of supplies rendered by these institutions creates even more difficulties.
Numerous educational institutions within South Africa conduct an enterprise with the rendering of taxable supplies and the provision of educational services. Such additional activities provided the educational institute qualifies for and is VAT registered, are taxed at the standard rate.
This has created complications in administering the VAT Act, whereby these service providers are then required to carry out an apportionment calculation of VAT on their mixed supplies. This practice is inefficient and not cost-effective. Furthermore, the ease of compliance, which was the basis of implementing the exemption, is diminished, as registration for VAT purposes is unavoidable.
Some of the other challenges faced by the Education Institutions are the rising costs of education and the Government's reduced funding results in most educational institutions increasing their activities, which fall outside of the s12 (h) exemption. Consequently, these institutions must register for VAT and apportion the VAT that cannot be wholly attributed to either taxable or exempt supplies.
Most of these institutions are not equipped to handle these complex apportionment ratio calculations. The formula proposed by the South African Revenue Service (SARS) for claiming input tax credits is highly complex. In addition, new apportionment ratio calculations often require a change in use adjustments creating additional complexity.
It has always been the intention of the South African VAT legislation that the financial burden falls on the end consumer. However, due to the Government and the sector's attempts to keep the cost of education as low as possible to encourage further education, institutions are funding the VAT cost associated with the supply of exempt educational services from internal resources.
To alleviate the financial and administrative burden associated with VAT accounting, Higher Education South Africa (HESA), on behalf of the sector, was invited to give a presentation to the Davis Tax Committee on a possible VAT reform for the industry.
Following the presentation, a formal request was submitted to propose VAT reform for the sector. The supply of educational services is taxable at a reduced rate, as the current treatment of long-term commercial accommodation.
This would place the industry in a VAT-neutral position in which the output tax payable on tuition fees would be funded by the additional input tax deduction that would become available and not by increasing tuition fees. Not only would the VAT cost be reduced but managing the VAT risk in the sector would become a much easier task.
In the 2015 National Budget Speech, the definition of educational services was raised and the VAT treatment of numerous expenditures. It was reported that the Davis Tax Committee is currently revising these VAT implications and that its conclusions will aid possible changes.
Universities South Africa (formerly known as Higher Education South Africa) made presentations at the Davis Tax Committee. The proposed zero rate VAT applies to educational and ancillary services in the higher education sector.
This was considered one of how universities' funding requirements would improve as input tax incurred on expenses would be recoverable. In contrast, no output tax would be payable on supplies made by universities. Further, this was believed to lessen the administrative and compliance burden related to VAT. However, the Davis Tax Committee did not support this proposal. However, the Davis Tax Committee requested that Universities in South Africa develop a proposal in which they make presentations for a case on alternatively applying a reduced VAT rate.
Part of the information requested from Institutions included information on the number of time institutions spent complying with VAT requirements. This would enable Davis Tax Committee to understand how an alternatively reduced VAT rate would simplify administrative procedures and reduce compliance costs for universities.
At this stage, no amendments have been made to the VAT Law, as such considerations have not been finalised. Therefore, the current burdensome VAT provisions apply and below, we highlight certain risk areas that we caution Institutions on.
VAT Risks Identified in the Education Sector
Supplies made by Education Institutions
Education Institutions primarily supply educational services exempt from VAT in terms of section 12(h). However, these institutions have expanded their services to obtain funding/revenue from other sources. One income stream that has become a material source of revenue for most higher educational institutions is research income in its various forms. Under current legislation, tuition fees, accommodation fees, and some state-funded research grants have no VAT implications. This, therefore, implies that all other income received by the Education Institutions is likely to be a taxable supply.
One of the most misconceptions by the Education Institutions is that they are not required to register for VAT purposes simply because they are an Education Institution. This is not correct!
All other income streams must be considered individually. Compulsory VAT registration will kick in should the R1 million threshold be met. As SARS can go back 5 years or more, depending on the circumstances, to assess an entity's VAT liability, this liability which would likely include penalties, interest and understatement penalties imposed in terms of the Tax Administration Act, could have a significant impact on the business of the Education Institution.
VAT on Imported Services
Imported services are particularly relevant in the library environment and typically include subscriptions to international journals and databases. In addition, institutional membership fees to international bodies, accreditation fees and international software licenses will also fall within the ambit of imported services.
In terms of section 7(1)(c ), VAT is levied on a person's supply of imported services. The VAT must be paid, in terms of section 7(2), by the recipient of the imported services.
The term imported service is defined in section 1(1) as a supply of service made by a supplier who is not a resident or carries on a business outside of the Republic to a recipient who is a resident of the Republic to the extent that the services are not used or consumed in the Republic to make taxable supplies. This, therefore, implies that Education Institutions that acquire imported services from a foreign supplier for final consumption must account for VAT at the standard rate to the extent that the services are used or consumed for purposes other than making taxable supplies.
It is also crucial that institutions implement procedures to ensure future compliance with the imported services provisions of the VAT Act.
In this regard, the new legislation governing the VAT registration of foreign suppliers of electronic services (discussed below) will have the effect that some of the subscriptions to international journals and databases will be subject to VAT at the standard rate and therefore the VAT provisions on imported services will not apply. In these instances, the normal rules of claiming input tax will apply.
The time of supply is the earlier of the invoice or payment date. Presumably, the invoice date will be before the payment date and therefore the invoice value should be used when calculating the liability. The difference between the invoice value and the actual payment is exchange gains or losses and should not have a VAT implication.
VAT on Electronic Services
The Original Regulations came into effect on 1 June 2014. These have since been updated. The intention of the Updated Regulations, which came into effect on 1 April 2019, is to substantially widen the scope of services that qualify as electronic services so that services supplied for a consideration (subject to a few exceptions), are provided through an electronic agent, electronic communication or the internet, are electronic services and must be charged with VAT at the standard rate.
The term "electronic services" is defined in section 1 of the VAT Act to mean "electronic services" as prescribed by a Regulation. The Regulation states that an "electronic service" is a service which is listed in the Regulation and is supplied using an "electronic agent", "electronic communication", or the "internet" for a "consideration".
In terms of the Regulation, electronic services include, among other things, a subscription service to any blog, journal, magazine, newspaper, games, internet-based auction service, periodical, publication, social networking service, webcast, webinar, website, web application and web series.
By virtue of foreign suppliers providing electronic services in South Africa, it is highly possible that they would have created a VAT presence in South Africa and subsequently applied for VAT registration as suppliers of electronic Services.
This, therefore, implies that Education Institutions will not have to account for VAT Output on Imported Services; however, the standard VAT rules will apply. Therefore, this means that the institutions can claim VAT on the supplies received from such foreign suppliers to the extent that such services relate to making taxable supplies.
The principle of the VAT system is that VAT incurred on the acquisition of goods and/or services by a vendor in the course or furtherance of making taxable supplies should not be a cost to a vendor unless specifically provided for in legislation. The exception provided for in section 12 of the VAT Act envisages that VAT incurred to make exempt supplies will not qualify as input tax.
When a vendor makes both taxable and exempt supplies, it is required to determine the extent to which the goods or services are used, consumed, or supplied while making taxable supplies. In this regard, determining the extent to which input tax may be deducted is regulated by the provisions of section 17(1) of the VAT Act. Most Education Institutions primarily provide exempt educational services and may be required to register for VAT as they also offer taxable supplies (standard and zero-rated supplies) and exempt and other non-taxable supplies. As a result, Education Institutions are required to apportion VAT in respect of those expenses that are not acquired wholly to make either taxable or exempt supplies
BGR 16 (issue 2) prescribes the method to determine the ratio contemplated in section 17(1). The turnover-based method is the only approved method for determining the "extent" of taxable supplies, as required in terms of section 17(1) of the VAT Act. Therefore, this method must be applied without a vendor requesting the use of another method and SARS approving such another process.
Further to the above, proviso (i) to section 17(1) of the VAT Act contains the so-called "de minimus rule" that provides for the intended use of goods or services where it equates to 95% or more for the making of taxable supplies to be whole to make taxable supplies (i.e. 100%). This means that vendors whose non-taxable supplies exceed 5% of total supplies must calculate an apportionment ratio to apply to the VAT paid for goods and services acquired for a dual purpose. However, vendors whose non-taxable supplies do not exceed 5% of their total supplies may claim a full input tax credit in respect of the tax paid relating to goods and services acquired for a dual purpose.
In circumstances where the turnover-based method is inappropriate because it produces an absurd result, proves impossible to use, or does not yield a fair approximation of the extent of taxable application of the enterprise's VAT-inclusive expenses, the vendor must approach SARS to obtain consensus on an alternative method which yields a more accurate result.
SARS issued a VAT Class Ruling (VCR) - Binding Class Ruling to Higher Education South Africa (HESA) to assist universities in properly classifying their services and calculating the input tax deduction in respect of goods and services acquired for the purpose of making taxable supplies. In terms of the VCR, the recovery rate on overhead expenses is limited to 12.5%. SARS approved a varied input tax method as an alternative apportionment method.
Research is also a defined focus area in which Education Institutions are now contracted by private entities for various types of research and consulting services. The VCR focused on the following type of research activities:
Applied research: means a project which is primarily directed towards a specific practical aim or objective and should result in the application of new knowledge into a process or product, or the transfer of existing knowledge into a new process or product, for the benefit of the donor or for the immediate purpose of commercialising the product.
Basis research: means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any application or use.
Research grants: means any appropriation of funds by an organ of state within the Republic for the research where the involvement or development of students is a requirement or condition.
SARS further ruled that research projects entered will partly meet the requirement contained in the definition of enterprise at the point when the research activity can be defined as "applied research".
The VCR also applies to assets of a capital nature (with a value of less than R1 million) purchased for research purposes. The apportionment percentage applicable to research activities will apply to the extent that the asset is used for a mixed purpose.
Where an asset of a capital nature is acquired for a mixed purpose, and the purchase price exceeds either R1 million or the applicable percentage is not appropriate, this asset will be subject to a special apportionment method that the Commissioner must approve for the SARS.
The following percentages shall apply to calculate input tax regarding research activities:
Type of research
Input tax treatment
50% input tax-deductible
Contract (student involvement)
50% input tax-deductible
Contract (no student involvement)
100% input tax-deductible
Although the directive was given only to members of HESA as per the VCR, the definitions and application can serve as a guide to what SARS may be open to allow to Education Institutions who approach SARS for an alternative method of apportionment.
Change in use adjustment
If capital goods or services are acquired, a vendor is required to estimate the percentage of taxable use to deduct input tax as soon as possible after acquisition or importation, despite the fact that the goods or service will be used, consumed or supplied during the subsequent tax periods. An adjustment must be effected when input tax has been deducted based on an estimate that does not reflect the actual taxable use. If the input tax deducted exceeds the input tax that should have been deducted, as the taxable use of the goods or service has decreased, an output tax adjustment must be made. Alternatively, where the input tax deducted is less than the input tax which should have been deducted, as the taxable use of the goods has increased, an input tax adjustment must be reflected.
A vendor who acquires capital goods or services wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies and subsequently reduces the taxable application or use of such goods or services shall be deemed, in terms of section 18(2), to make a taxable supply to the extent that there is a decrease in the application or use of such goods or service to its application. The supply value is determined by applying the formula as set out in section 10(9), subject to the provisions of that section.
Capital goods or services acquired or applied partly for the purpose of use, consumption or supply in the course of making taxable supplies shall be deemed to be supplied to the vendor in terms of section 18(5) to the extent that there is a subsequent increase in the taxable use of the goods or service.
The provisions of section 18(2) read with section 10(9), and section 18(5) are only applicable to capital goods or services where the change in use of such capital goods or services where the difference in the use of such capital goods or service exceeds 10%. The provision to sections 18(2) and (5) provides that an adjustment does not have to be made in the following instances:
- The capital goods or services have an adjusted cost of less than R40 000 (excluding tax).
- The capital goods or service costs less than R40 000 (excluding tax); or
- The capital goods or services were deemed to be supplied in terms of section 18(4) and the amount, being the lesser of the adjusted cost to the vendor of acquisition, manufacture, assembly, construction or production of those goods, was less than R40 000 when the goods or services were deemed to be supplied to such vendor
According to the VCR, SARS ruled that an adjustment is to be made at year-end in sections 18(2) and (5) regarding all capital goods applied for mixed purposes. In calculating the adjustment, determine the difference between the apportionment ratio for the current and previous financial year (the adjustment percentage). If the difference exceeds 10%, apply the adjustment percentage to the VAT paid on the acquisition of capital goods.
VAT on exchange transactions/Barter transactions
The VAT Act does not define a barter transaction. According to the VAT guide for vendors (VAT 404), a barter transaction occurs when goods or services are exchanged for other goods and/or services. Payment of the consideration may also be partly in money and partly in goods and/or services exchanged.
According to section 10(4) of the VAT Act, to the extent that payment is not in money, the consideration is the open market value (OMV) of goods and/or services received. In terms of this section, the value of a supply is deemed to be the open market value of that supply where:
- The charge is lower than the open market value of the supply;
- The parties are connected persons; and
- The recipient is not entitled to a full input tax deduction.
A connected person is defined in Section 1 of the VAT Act.
SARS, in its Interpretation Note 67, considered the definition of a "connected person" in terms of the Income Tax legislation considered the term control. The Interpretation note states that control "refers to de facto control and not shareholder control". SARS further states that "de facto control is generally but not necessarily held and exercised by the board of directors." The note states that the facts and circumstances of each case should be considered and that the influence of controlling individuals may significantly impact whether the parties are controlled by the same person.
It will have to be analysed if the Institutions are considered to be a connected person to other entities (sister companies and non-sister companies) is contracted. The definition of consideration in the VAT Act provides that consideration includes any payment made, whether in money or otherwise, it may be voluntary or not and may take the form of any act or 'forbearance' (that is, failure to act), in respect of the supply of goods or services.
Other common VAT Risks
As VAT is a transactional type of tax, there are a lot of risks that can be identified based on the vendors' activities and transactions. One would need to analyse the risk on a transaction-by-transaction basis.
However, the below factors tend to be some of the contributing factors associated with non-compliance when it comes to VAT. These are, but are not limited to:
- Duplicate expenditure
- Inadequate risk assessments/identifiers
- Adequate process not followed
- Late filing of returns and not responding to SARS queries on time
- Poor record-keeping
- Lack of VAT knowledge or not utilising skilled personnel
- Claiming input VAT on prohibited expenditure
We believe the solution to all the above can be obtained in the use of VAT Analytics and we have highlighted the benefits and proposed solutions below.
- Tax Analytics
In today's fast-moving economy, institutions are increasingly challenged to meet their multiple tax obligations worldwide, often using limited resources. Challenges include the large number and different types of transactions performed. Tax authorities are also becoming more sophisticated in their methods and frequency of auditing companies. These trends make managing indirect taxes more critical than ever. Managing indirect tax requires proper knowledge of and control over:
- Data quality
- ERP set-up issues
- Supply chain visibility
- VAT risk monitoring
- Partial manual reporting processes
- Cash flow management
- Performance measurement
In South Africa's heightened regulatory environment, especially in the Education sector, many tax functions struggle to strike the right balance and have largely expended their tax resources on compliance activities out of necessity. Tax functions that focus on these activities to the exclusion of all others may feel trapped in an endless set of tasks with limited ability to focus on creating value and managing tax risk and handling large quantities of data that need to be analysed. The solution we utilise can access the data at the source and independently analyse large volumes of transactions across the Institution's entire data population (e.g., data files, spreadsheets and reports) without using sampling techniques, which can increase the risk of undetected errors/variances.
Our approach, which has been developed through leveraging the benefits of data analysis techniques, provides the Education Institutions with the ability to monitor tax outcomes on a continuous, real-time basis. This approach can be customised to any business and is instrumental in improving the overall effectiveness and quality of the management of your transactional and income tax risk. This is achieved by applying a suite of proven data analytics that will assist you in managing tax in your organisation. You will be able to manage risk, save time and improve efficiency by using pre-built automated analytics rather than extracting and analysing data manually or on an ad-hoc basis, which can prove to be ineffective at times.
The benefits are that you will gain insight into your tax-related financial data and highlight areas of process weakness and control ineffectiveness that can be remediated to avoid future tax risks. By releasing senior management to spend more time on strategic tax management matters, this approach will enable the tax function to maximise the value added to the Education Institution. You will be able to manage risk, save time and improve efficiency by using pre-built automated analytics rather than extracting and analysing data manually or on an ad-hoc basis, which can prove to be ineffective at times.
The annual report issued by the Auditor General has identified the following key issues that impose a risk relating to human resources on higher educational institutions:
- Payments made to education and training employees without proper approval employees tax risk). The department might not be withholding employees' tax and paying it to SARS on the payments made
- Payment of shift allowance to CET employees.
- Fraudulent payment made to the employee
- Outdated Human Resources policies and financial systems responsible for capturing payments to employees.
- Poor controls in relation to leave capturing
- Payments in respect of leave.
- Overall policies and procedures in place to ensure monthly, quarterly, and annual financial and performance reports may not be complete and up to date
- Employee records not properly kept no system in place to store large volumes of information received from Tvets
- Recurring findings regarding monthly reconciliation of employee benefits
- Payments to employees not properly authorised (CET employees)
- Backdated payment to employees without enough support
- Validity of learners funded through community-based skills development initiatives
- Travel claim duplication
The above risks identified may have an impact on the withholding of employee tax by the institutions of higher learning.
The tax law requires:
All employers o withhold tax and pay it over to the tax authorities within 7 days after the end of the month during which the amount was deducted or withheld. They have an obligation to ensure that the correct amount of employees` tax is calculated and paid over to SARS within the specified period as stipulated by the Commissioner of SARS.
At the end of each tax period, the employer is obliged to issue each employee with an employee's tax certificate [IRP5/IT3 (a)] which reflects, amongst other details, the employees' tax deducted.
In addition to employees' tax, there is a compulsory levy for the purposes of funding education and training. This levy is governed by the Skills Development Act, 1998. It is called Skills Development Levy (SDL) and is payable by employers monthly. The amount payable is 1% of the leviable amount (taxable income). There is another compulsory contribution to fund unemployment benefits. This levy is called Unemployment Insurance Fund and it's governed by the Unemployment Fund Act. The employer and employee are liable for the contribution.
For employees' tax to be payable, three elements must be present: there must be an employer paying remuneration to the employee. The employer must determine the employment relationship to be able to classify the employee correctly to determine the correct rate which must be applied to deduct employees' tax from the remuneration of the specific employee. Below we detail areas where higher education institutions might need to engage tax specialists to determine whether an employer-employee relationship exists and whether amounts paid qualify as remuneration.
Third-party service providers
As a general principle, whether an employee is classified as an independent contractor or employee might impact the employer's obligation to withhold and pay taxes as detailed above. Where a third-party service provider is not correctly classified, the higher education institution might be under-declaring tax where the third party should have been declared as an employee of the Institution.
Independent contractor is not defined in the Income Tax Act; however, the definition of remuneration brings some issue of independent contractor. The definition of remuneration in terms of the Fourth Schedule of the Act excludes payments made to a person carrying on a separate trade from the employer. Therefore, an independent contractor is not an employee, any amounts accrued to or received by an independent contractor are not subject to employees' tax. The independent contractor will be taxed according to the individual tax tables.
In order to classify whether a person is an independent contractor, two tests are applied: the statutory test and common law test. In practice, the statutory test is considered first, if the requirements of the statutory test are satisfied, the common law dominant impression test is applied.
SARS issued the interpretation note 17 (Issue 4) on 14 March 2018 to give more clarity to employers on the classification of independent contractors. In determining the statutory test, the following should be taken into account:
- A residency status of the independent contractor, if the person is a non-resident, that person cannot be an independent contractor.
- If services are performed mainly at the premises of the person paying for or requesting the service and the service provider is subject to the control and supervision as to how the duties are performed or to the hours of work
- If the person rendering the services is subject to the control as to the manner in which the duties are to be performed or hours of work
- Except if the person throughout the year of assessment employs three or more employees who are full time in rendering the service on behalf of the person, other than the connected person to such person.
- Supervision and control are the only factors indicating employment.
- If the person is told when to start work and how to work, it could not be said that the employer has control over his hours of work, and he would not be carrying on an independent trade.
- In addition, if the employer controls how the employee has to work at the employer's premises, this means the person is not carrying on a trade independently and thus cannot be called an independent contractor
- The common law dominant impression test is an analytical tool that is designed for application in the employment environment to establish the dependence or independence of a person rendering the service.
- In making an evaluation, several indicators are used. These indicators are grouped into three categories:
- Near conclusive indicators, such as the manner of control.
- Clear indicators include whether or not the worker is receiving instructions or supervision.
- Resonant indicators, such as who provides the tools of the trade
- The correct classification of a relationship as either employee or independent contracting is vital due to the differences in tax treatment.
- An employer is in the best position based on the facts and actual situation to evaluate whether an individual is an independent contractor or an employer.
- The decision on whether a person is an employee, or an independent contractor impacts the employer's obligation to deduct the employee's tax.
- An employer who has incorrectly determined that a person is an independent contractor is liable for employees' tax that should have been deducted and interest plus penalties.
What can institutions do to mitigate the risk?
- Proper assessments and controls should be in place to ensure that the employer, in this case, the Higher Education can identify this category of employees correctly for employee tax purposes.
- We will work with the procurement and payroll department to develop a control process that can be implemented by the employer for proper analysis.
- Recommend and oversee the implementation of the system
- Test effectiveness of the process implemented
- Improve any gaps noted during testing
- Where payments have been made already to the PSP without withholding employees' Tax, we will recommend approaching SARS through the Voluntary Disclosure Program (VDP)
- We recommend that management submits a Voluntary disclosure application (Vda) to SARS.
Employee benefits are governed by the Seventh Schedule to the Income Tax Act. An obligation is placed on the employer to correctly determine the cash equivalent of the value of a taxable benefit for employees' tax purposes.
Insurance risk products
The employer's taxation of insurance premiums contributions is governed by paragraph 2(k) of the Seventh Schedule to Income Tax Act.
In terms of the abovementioned paragraph, a taxable benefit arises if an employer makes any payment to any insurer under an insurance policy directly or indirectly for the benefit of an employer or spouse, dependent, child or a nominee
The paragraph does not apply to policies arising solely out of and in the employee's course of employment, such as an accident policy where a pay-out is regarding an employee injured at work. The premium that the employer pays is not regarded as a taxable benefit.
However, some employers overlook this tax benefit and therefore do not tax it accordingly. Failure to withhold employees' tax may result in the payment of interest and penalties.
Institutions often award bursaries and scholarships to their employees (lecturers and general employees of the institutions) or to relatives of employees.
These are bonafide scholarships or bursaries to enable or assist a person in studying at a recognised university or Institution.
These bursaries or scholarships are exempt in section 10(1)(q) of the Act. The section outlines that bursary will be exempt from tax if a bona fide bursary or scholarship is granted to any person to study at a recognised educational or research institute. The bursary or scholarship given to an employee will be exempt from tax provided that the employee agrees to repay the employer if that employee fails to complete the course of study for reasons other than ill-health, death or injury.
In the case where the bursary or scholarship is granted to an employee's relative, the exemption will not apply under the following conditions:
- If the employee's remuneration for that year of assessment is more than R600 000 and
- In the case of any such relative, during the year of assessment, exceeds-
- R20 000 in respect of grade R to twelve or a qualification to which an NQF level from 1 and including 4 has been allocated under the National Qualifications Framework Act, 2008 and
- R60 000 in respect of qualification to which an NQF level from 5 up to and including 10 has been allocated in accordance with chapter 2 of the National Qualification's Framework Act 2008
However, in terms of the above-mentioned section, employers are allowed to redirect a portion of their employees' remuneration towards school fees in the form of a bona fide scholarship or bursary in the form of a salary sacrifice, thereby effectively reducing the tax liability of the employee.
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 as contemplated in paragraph (ii) of the provisos to section 10(1)(q) and section 10(1) (qA), should only apply if that bona fide bursary or scholarship granted by the employer is not only restricted to the relatives of the employee but is an open bursary or scholarship available and provided to members of the general public; and
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.
It is further proposed that, as a means of further encouraging employers to grant bursaries to relatives of employees without subjecting such bursary to an element of salary sacrifice, the employer deduction in relation to said bursaries is only afforded if the bursary to the employee's relative is not subject to a factor of salary sacrifice.
The new amendment is effective from 1 March 2021
Paragraph 2(d) of the Seventh Schedule of the Income Tax provides that a taxable benefit shall be deemed to have been granted where the employer has provided the employee with the residential accommodation either free of charge or for a rental consideration which is less than the value of such accommodation as determined by paragraph 9 of the seventh schedule of the Act.
The value to be placed on the benefit is the greater of:
Any rent payable by the employer and other expenditure in respect of the accommodation, or
An amount determined according to the formula (A-B) X C/100X D/12
Educational institutions normally provide their employees with employer-owned houses/flats. These employees may pay a monthly rental lower than the prevailing market value. The employer may fail to withhold an appropriate employee's tax in such a case.
Some payments may be made to the employees outside the payroll system. Some of these payments may be in the form of advances. The advances may be for travel, entertainment and subsistence.
Section 8(1)(a)(i) of the Income Tax Act provides that all allowances and advances paid by a "principal" to a "recipient "must be included in the recipient's taxable income to the extent that they are not expended for travelling on business; or for accommodation, meals and incidental costs while such office holder or employee is obliged to spend at least one night away from his or her usual place of residence as a result of business or official purposes; or because of the duties attendant upon public office.
Section 8(1)(a)(ii) provides that in limited circumstances, a reimbursement or advance must not be included in taxable income as otherwise required by section 8(1)(a)(i) the reimbursement or advance was or must be expended by the recipient on the instruction of the principal in the furtherance of the principal's trade; and the recipient must produce proof to the principal that the amounts were wholly and actually expended for this purpose.
Subsistence allowances are generally not subject to employees' tax. However, if a subsistence allowance or advance is paid or granted to an employee during any month, and that employee had not spent the anticipated time away from his or her usual place of residence on business by the end of the month following the month in which the allowance or advance was paid or granted, it will be subject to employees' tax if the employee has not refunded such amount to the employer. This ensures that subsistence allowances or advances are not used as a form of salary structuring by employers and do not result in employees receiving a tax-free allowance
Risk in respect of employee benefits:
- The incorrect payment of employees poses a huge financial risk for companies as the wage bill can constitute over 50% of operating expenses. Poor controls can also lead to fraud, and therefore, strict rules regarding the payment of salaries need to be in place. Employers can also be found in contravention of legislation if the incorrect amounts of tax or other statutory deductions are not paid over correctly.
- Failure to determine the cash equivalent of the employee benefits may result in an employer not withholding the correct employees' tax.
- This may result in the levying of interest and penalties by SARS.
Solutions in respect of employee benefits:
- A review of the entire payroll process needs to be conducted, and where gaps are identified, systems need to be put in place to correct them. A detailed blueprint for payroll processing needs to be developed and adhered to, including more than one person signing off the payroll. A remuneration policy needs to be developed that outlines how tax, overtime, and other payments are to be made, i.e. leave. A remuneration policy will guide salary decisions and ensure that remuneration is equitable and fair as the Employment Equity Act requires.
- HR Policies should be reviewed to ensure compliance with current legislation and best practice, i.e., leave policy. This will include the following:
- We will review the payroll documentation, including remuneration structuring policy documents, to determine whether the provisions of the Income Tax Act have been complied with.
- We will examine all benefits and allowances provided to employees and the PAYE treatment. Further, we will ensure the correct application of human resources, remuneration policies and practices.
- Where the discrepancies have been identified, we will bring such to management's attention and quantify the error.
- In the cases where there is a liability to SARS, we will recommend approaching SARS through the Voluntary Disclosure Program (VDP)
- We recommend that management submit a Voluntary disclosure application (Vda) to SARS.