Employer repaying employee’s study loan – fringe benefit
12 December 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: I have a
client who hired a newly qualified student and agreed to pay her study loan.
The student completed her degree last year and immediately thereafter started
to work at Company ABC. As her degree is applicable to her line of work,
Company ABC decided to take over the study loan obligation amounting to
approximately R110,000 which must be paid back over a period of four years.
There is a work back payback agreement with her on the basis that Company ABC
will pay the monthly instalment (R 2,500) on her behalf to the institution, and
she has to work back an equal period of time that it will take to repay the
study obligation which is approximately 4 years.
I have looked at SARS Interpretation Note 66 and the SARS
Employer’s Guide in respect of Fringe benefits. Both these sources state that
where an employer takes over a study loan obligation from a previous employer
no value is to be placed on the fringe benefit in certain circumstances. Extract
from the SARS Employer’s Guide:
No value shall be placed on the benefit should the new
employer grant a low interest or interest free loan to the employee in order to
enable him/her to recompense the previous employer, such new loan cannot be
regarded as a study loan in respect of which no benefit is considered to arise.
However, a refund of any bursary, study loan or similar assistance by an
employer on behalf of his/her employee to the employee's previous employer, is
not regarded as a taxable benefit, if:
- The employee‘s previous employer made a grant on
condition that the employee rendered service to the employer for an agreed
- On termination of service before the expiration
of the period agreed upon, the employee is liable to refund an amount to his/her
- Upon accepting employment with a new employer,
the outstanding amount is refunded to the previous employer by the new employer
on behalf of the employee
- The employee consequently is liable to work for
the new employer for a period not shorter than the remaining period which
he/she should still have worked for the previous employer.
My interpretation of the SARS Guide and Interpretation Note
66 is that in this particular case the employee would be taxed on the R2500
paid by the employer as repayment of her study loan, despite the fact that she
is required to work for the employer for the period it would take to repay the
loan. Had she been employed by some other employer first, and Company ABC hired
her and took over the study loan from the previous employer the amount would
however NOT be taxable. This does not seem fair to me. I would appreciate your
comments on the matter.
A: The relevant
part in the Income Tax Act that deals with this is paragraph 2(h) of the
Seventh Schedule. This is because ‘the
employer has, whether directly or indirectly, paid any debt owing by the
employee to any third person (other than an amount in respect of which item (i)
or (j) applies), without requiring the employee to reimburse the employer for
the amount paid or the employer has released the employee from an obligation to
pay any debt owing by the employee to the employer”.
We agree with your view that the ‘no value’ in terms of
paragraph 13(3) of the Seventh Schedule does not apply. We agree that the reason is that no study
assistance was granted by a previous employer where the employee assumed an
obligation to render services to the former employer for an agreed period. The
current employer also didn’t pay an amount to the former employer on the employee’s
We can’t comment on whether or not this is fair – it is the
correct application of the law.
Disclaimer: Nothing in
this query and answer should be construed as constituting tax advice or a tax
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circumstances of each transaction/case. Even though great care has been taken
to ensure the accuracy of the answer, SAIT do not accept any responsibility for
consequences of decisions taken based on this query and answer. It remains your
own responsibility to consult the relevant primary resources when taking a