Income tax implications of bursaries

The cost of tertiary education keeps rising and companies are always looking for new talent, thus bursaries are awarded by a lot of companies. Beware though, as there may be some tax consequences that you were not aware of.

Where you award bona fide bursaries to students/employees to study at a recognised educational institution and with the bursary comes the obligation that the student/employee should work for you once the studies are completed, the bursary costs incurred are deductible for income tax.

In addition, the student receiving the bursary is exempt from income tax in Namibia on the amount received.

Although the bursaries are generally exempted, there could be tax implications for both the employer and the student in the event that any of the following scenarios take place:

1. Where a student awarded with a bursary ceases to study (i.e. drops out of school) without completing the studies and thus the student would not be returning to work for the employer, the amounts deducted previously should be included in the taxable income of the employer.

Where the student is obliged by the bursary contract to reimburse the employer in this event, it would be subject to income tax with the employer.

2. When an employer offers bursaries to their employees’ children, these bursaries are not exempt from tax but treated as fringe benefits to the employees (i.e. parents) and included in their taxable income.

3. In the event where an employer takes over bursary contracts from another company, so that the bursary holder can work for the employer, this “buyout” is handled as follows:

a. The costs incurred by the employer can be deducted for income tax purposes.

b. When the employer is treating the bursary buyout as a loan receivable from the employee, there will be no tax deduction benefit for the employer for the bursary buyout. The repayment to the employer will not be taxable unless interest is charged on the loan, in which case the interest portion would be taxable.

c. Where the employer is paying a third party for a bursary that this new employee is owing the third party, with the view of bringing that employee into employment and the amount does not need to be repaid by the employee, this would constitute a debt that is settled on behalf of the employee with the third party. This would constitute a fringe benefit and will accordingly be taxable in the hands of the employee.

It is thus important to understand the implications of bursaries as it may result in unintended consequences from a tax point of view.

*Johan Nel is a partner: corporate tax service at PwC Namibia. Tax Time is published in Market Watch bi-monthly on a Monday.