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If you're paying for your employee's studies, don't forget about the fringe benefit tax

by , 15 December 2014
If your employees want to study further, you should encourage it because it brings in new skills and knowledge into your company. An example of this is Floyd Shivambu who received his Masters of Arts from Wits University last week. Because of his higher qualification, he brings more knowledge and skills into the EFF that the organisation can benefit from.

But unfortunately many employees can't afford to study further. That's why so many employers pay for their studies.

It's a great way to improve the knowledge base in your company and to help your employees get their qualifications.

But, paying for your employee's studies comes with a catch in the form of fringe benefit tax.

Here's how to handle the tax on this fringe benefit correctly so you don't incur penalties from SARS...

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Here's what you have to do to handle fringe benefit tax if you pay for your employee's studies

If you give your employee a scholarship or bursary to help him study, it's tax-free (Section 10(1)(q) of the Income Tax Act). This means you don't have to charge your employee fringe benefit tax on this benefit.
But it does have to meet certain requirements:
1. For it to be tax-free, sign an agreement with your employee to say he'll pay you back if he doesn't complete his studies. The only exceptions are if he doesn't finish because he dies, is ill or injured. If the employee doesn't complete the studies, he'll have to pay fringe benefit tax on the money as if it were a normal loan.
2. You must have certain written conditions such as a period of time he must work in your company. If your employee doesn't meet these conditions, the scholarship turns into a taxable loan. This means you treat it as taxable fringe benefit. 
But what do you do if you're helping your employee pay his ex-boss back for his studies?
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Here's how to treat the tax if you help your employee pay back his ex-boss for study fees

If you help your employee pay back his ex-boss for his study fees, it's not a taxable fringe benefit as long as:
His ex-boss needed him to work for an agreed time to pay off the bursary or study loan;
Your employee has to pay back the bursary or study loan because he didn't complete his studies in the right time; and
You pay the amount directly to the previous employer for him once he accepts a job with you. 
And if you give your employee's relative a scholarship or bursary, there's a limit to the exemption. This depends on the type of education. The limitations are:
Basic education (employee's relative) R10 000; and
Higher education (employee's relative) R30 000. 
If the employee's earns more than R250 000, this exemption doesn't apply at all!
So if you, like the EFF, want to benefit from employees with higher education, it's a great idea to help them with their studies. But if you don't handle the fringe benefit tax correctly or don't have the right agreements in place, SARS will hit you with a massive penalty. 
For more information on fringe benefit tax, check out the Fringe Benefit Guide. It contains everything you need to know about fringe benefits. 

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