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Proposed SA Tax Change to Put Thousands of Low-Income Families at Financial Risk

National Treasury is proposing an alteration to the Income Tax Act that will remove the ability of thousands of low income South African families to receive tax exempt bursaries for their children. The families currently benefiting from this are majority black, low-income households and this alteration, should it go ahead, will severely impact thousands of families’ ability to pay for quality education, especially significant in a post-COVID-19 economy.

Vedika Andhee, a leading tax expert, says, “COVID-19 has devastated our economy. Dual income households have become ‘single’ income’ or ‘no income’ households. Fortunately, as is the culture in South Africa, irrespective of how difficult their own circumstances, where employed family members can assist, they readily step up. It has therefore become more important than ever that this benefit continues to exist and relief is provided to these employees.”

“Of all the current tax incentives available, the assistance on education is such an important one, allowing low income earners to provide a quality education for South Africa’s next generation,” says Kholofelo Monyela, Human Capital Consultant at RMA.

Marli Botha, Manager at SmartFunder, agrees with this sentiment and explains: In 2006 National Treasury decided to make salary-sacrifice as a component of non-taxable bursaries allowable. An employee originally had to earn less than R100,000 per year to qualify for the incentive, but National Treasury has increased this limit a number of times since 2006 to allow for more people to use it, and, as it reads today, employees earning less than R600,000 per annum qualify for this benefit.”

Employees within the above threshold can voluntarily give up part of their own salary, called a ‘salary sacrifice’, in exchange for a non-taxable bursary for a relative. These bursaries are capped at R20,000 for NQF levels 1 to 4 and school, and R60,000 for tertiary NQF levels 5 to 10 education.

However, according to public records, National Treasury is now seeking to reverse its 2006 decision to make employer-provided bursaries to relatives of employees taxable in the hands of employees, if an element of salary-sacrifice is present – effective from 1 March 2021.

“This is going completely against the tide of our Government’s commitment to make access and funding to education more accessible and affordable in South Africa and has raised many eyebrows among many stakeholders,” says Botha.

Recent public hearings held by National Treasury on the proposed changes have received hundreds of submissions from the public opposing the change, including employers, schools and parents who use this unique and progressive incentive.

Monica Mphofu, a parent, adds, “I am a breadwinner at home and a single mother of two girls, 17 and 13 years old. Before the tax benefit, I could barely afford providing for my family, after paying school fees out of my net salary. I found myself getting involved in debt just to manage during the month before the next pay day. This has made a huge difference in our lives. It came at a right time when I needed it most.”

Concerns were recently raised during public hearings by the Chair of the Select Committee on Finance in Parliament, Yunus Carrim, that Treasury had not provided equally compelling arguments as raised by stakeholders, as expressed in the Select Committee on Finance reports. In addition, it was referenced that National Treasury could have found a compromise between its concerns and those of the stakeholders opposed to this amendment.

Other concerns raised included the inability of National Treasury to accurately quantify the loss to the fiscus that they have been arguing as the reason for the proposed change, coupled with the fact that the body has not yet done an impact study to determine the positive and negative effects of the proposed changes.

Corporate South Africa has also had its say on the issue through various leading companies: Elzahne Henn, Director for Tax Consulting at Mazars in South Africa says, “The 2020 Explanatory Memorandum to the Draft Taxation Laws Amendment Bill (TLAB) fails to refer to the ongoing skills shortage or challenges experienced by the so called ‘missing middle’ in accessing affordable quality education. Instead, the proposal seems to be premised on the perception that the exemption is being used as a tax planning opportunity by employers and employees, which results in a loss to the fiscus. It is in fact not clear what the actual loss to the fiscus is in relation to scholarships and bursaries provided to relatives of employees. The reality is that the salary sacrifice was not used as a tax planning tool. It gave employers the ability to make quality education affordable for employees that struggle to afford quality education for their relatives. This would not have been possible if not provided on a salary sacrifice basis.”

Jako le Roux, Benefits Manager at Dimension Data, adds, “The success stories of the lives changed from this benefit is heart-warming and it will be a big blow for the education prospects of the impacted children when it comes to getting a chance at a better future through this incentive.”

To date, many alternatives and compromises have been put forward by various stakeholders, most notably that the new IRP5 codes must be introduced as a first measure to enable National Treasury to monitor the utilisation of the incentive firstly, to monitor the actual loss to the fiscus. The option would then be open to use the monetary limits, which they have significantly increased over the last few years, rather than closing the door completely on education and the associated long-term impact on skills development and stimulating South Africa’s economy.

“It is unclear why a decision that will negatively affect thousands, is being made based on assumptions rather than performing the necessary steps to ascertain the effects of such a change,” says Botha.

Views such as the above were expressed in the recent public hearings of the Select Committee on Finance in Parliament, which reportedly saw not one Member of the Select Committee on Finance in Parliament enthusiastically support the amendment proposed by Treasury.

It also emerged during the public hearings that National Treasury had not provided a reply to a question posed to them about the extent of the loss to the fiscus which Treasury had said was the motivation for the amendment. When it was supplied, it emerged that Treasury had used a national figure of all bursaries provided and not just the figures for those who were benefiting from the Employer-provided bursary facility which Treasury itself has initiated since 2006.

Parent Portia Ngobenimentioned the following on the positive impact this tax incentive has made on her family: “I have tears running down my face because I remember there was a day my daughter and I slept on an empty stomach, that day is a day I will never forget. I remember my daughter saying, ‘Mommy, I’m hungry,’ and I had nothing to give to her. I’m a single mom and trying by all means to provide the best for my daughter – especially a good education. This tax benefit has helped me tremendously with the extra that I have now. I will be forever grateful and from the bottom of my heart. I humbly appreciate as you help us to educate our future leaders, doctors, teachers and nurses for our beautiful country. Thank you.”

The bill was already passed by the National Assembly and then voted on by the NCOP on Tuesday, 8 December. It will now be sent to the Presidency for consideration.