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Tax Relief For Staff Development

17 January 2011   (0 Comments)
Posted by: Author: Mahomed Kamdar
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Tax Relief For Staff Development

Bursaries and scholarships, often referred to as awards, can be granted by employers to employees or to relatives of employees.

Three requirements must be met before any bursary or scholarship qualifies for exemption:

• The award must be a bona fide scholarship or bursary;

• It must enable or assist a person to study,

• Study must be pursued at a recognised university

The Income Tax Act makes a distinction between a bursary awarded to a non-employee, or an employee or a relative of an employee.

• The recipients of scholarships or bursaries are exempt from normal tax if they have competed for it, or are awarded on merit  academic or otherwise  by applying for it and do not have to be employees or relatives of employees.

• The award of a bursary by an employer to current employees will be tax-exempt as long as the employee agrees to pay the bursary back to the employer if he (she) fails to complete the studies unless failure to complete studies occurs as a result of death, ill-health or injury.

.• In the case of a scholarship or bursary granted to enable or assist any such relative of an employee so to study, the exemption will only apply:

a) If the remuneration derived by the employee during the year of assessment does not exceed R100 000; and
b) To the extent that such scholarship or bursary does not exceed R10 000;

Example:

If Paul, a son of Peter (an employee of Clarks Bookshop, and earns an annual salary of R90,000) was awarded a bursary of R15 000 to study at a university. The tax consequences for Peter is that R10,000 of the bursary will be exempted from his gross income and he will be taxed on R5,000. The exemption stipulated in Section 10(1)(q) will apply to the first R10,000 rand only.

Can employers obtain a tax benefit by improving the knowledge base or education of employees? In order to answer this question some underlying issues need to be addressed. 

It is suggested that expenses incurred by a taxpayer in improving his / her knowledge base should be determined under the requirements of the general deduction formula, widely known as Section 11(a) and read with Section 23(g). Moreover, no general rule is advanced and each educational expense incurred depends upon its own facts and circumstances.

In income tax case {ITC 1066 (1964) 27 SATC 114}, the court held that expenditure incurred by a specialist surgeon on attending a medical congress was not allowable under Section 11(a) because the surgeon attended the congress with the aim of improving his knowledge and the expenditure was of a capital nature.In addition, the court argued that the expenditure was not sufficiently linked to the production of income and could not be regarded as forming part of the cost of performing the surgeon income-earning operations.

The taxpayer should address the question whether the education expense is to be regarded as of a capital nature or as of a revenue nature. If it is of a capital nature then the route of general deduction formula cannot be pursued any further.If it is of revenue nature, then the requirement of Section 11(a) has to be met.The latter requirement will be met if the educational expense is in close proximity /related to the trade of the taxpayer.

For example:

If an accounting firm sends its staff to attend courses in tax at an institution of higher learning, it is likely that such expenditure has been incurred in the production of income. On the other hand, if the same staff were enrolled for a course on gardening, then it is irrefutable that such expenses have not been incurred in the production of income.

The concept of ‘capital’ in relation to educational expenses needs to be explored. The relevant question is, ‘Does the educational expense create an enduring benefit?’ It is likely that the awarding of a formal degree or diploma improves the taxpayers’ knowledge and the expenses are likely to be described as expenses incurred in the production of future income and constitutes expenses incurred in enhancing the taxpayer’s income earning structure and not enhancing the income earning operation. In tax case {ITC 1433, 50 SATC 73}, the court found that the cost of studying new developments in computers to keep abreast with latest developments was not of an enduring benefit but a temporary one because of the peculiarities of the IT industry; computer technology changes rapidly.

In income tax case {ITC No 1129 (1969) 31 SATC 144 (R)}, the taxpayer awarded bursaries to three students and deducted these amounts as having been expended by it solely for the purposes of advertising itself and therefore, not of a capital nature but exclusively incurred for the purposes of production of income. The court, however, ruled that object of awarding the bursaries was to increase the taxpayer’s goodwill; the expenditure was incurred to improve the appellant’s image.In addition, there was nothing in the evidence to suggest that the decisions to make the awards that would lead to immediate increases in the taxpayers current sales. In these circumstances, the court ruled that the bursary awards were of a capital nature; the expenditure was more closely related to the taxpayer’s income-earning structure than to its income-earning operations.Although, the fact that the bursary expenditure did not either create new physical assets or add to existing physical assets does not necessarily mean that the expenditure was of a revenue nature.

In many instances, the tax court has disallowed expenditure incurred by professional men, university lecturers and businessmen, traveling abroad to attend courses. The following cases are informative.In KBI v Van der Walt 1986 (4) SA 303 (T), the taxpayer was a lecturer in law at Potchefsroom University. He received a salary and claimed deductions in respect of home study, journals and stationery and photocopies. The issue was whether these expenditures are deductible in terms of Section 11 (a) read with section 23 (g). The court held that the taxpayer’s occupation as a salaried lecturer constituted a `trade’ and the aforementioned expenses were deductible under the relevant provisions.

After this decision was taken, it was followed by amendments to Section 23(b) and Section 23(m). The Revenue Laws Amendment Act No 31 of 2005, back-dated to 1 March 2002, amended section 23(m) so that employees, subject to the restrictions contained in section 23(b), will be able to claim generally most expenditure incurred in using their own premises or home for business purposes. Section 23(b) provides the following requirements before any deduction will be allowed:

• The study, office, or other part of the premises used for trade must be ‘specifically equipped and regularly and exclusively used’ for purposes of trade;

• No deduction is available if the taxpayer’s trade constitutes any employment or the holding of office, unless, The taxpayer’s income from such employment or office is derived mainly form commission or other variable payments that are based on the taxpayer’s work performance and his duties mainly performed otherwise than in a office provided to him by the employer, or

- The empoyee’s duties are mainly performed at the home office.
SARS has ruled that the fees paid by practicing attorneys for attending courses conducted by Law Societies, and presumably the cost incurred by practicing accountants, in attending programmes conducted by SAIPA as part of the continuing education programme, will be allowed as deduction under section 11 of the Income Tax Act.Provided such courses are part of continued updating of knowledge, and not acquiring a new qualification, which would be of a capital nature.

Conclusion:

The deduction of education expenditure requires that the expenditure be closely related to the earning of the taxpayers’ income in order to qualify for a Section 11 deduction.Section 82 of the Income Tax Act is explicit that the burden of proof that an amount is subject to any deduction in terms of the Income Tax Act rests upon the taxpayer.

Source: By Mahomed Kamdar (Tax Professional)


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