/ 23 September 2008

Taxing research?

Universities expressed concern last week about whether payments to post­doctoral students should be taxed.

Changes to the tax exemption that applies to bursaries and scholarships, in particular postdoctoral fellowships, could hinder efforts to grow the country’s research capacity, the registrars and research heads of several institutions warned.

The change to the tax regime is set to force universities to formalise procedures and processes already in place that deal with postdoctoral students.

This follows the issue for comment by the South African Revenue Service (Sars) of a draft interpretation note pertaining to scholarships and bursaries. This interpretation note is almost identical to a practice note issued in 1993 and explains how Sars will apply its interpretation of the particular section in the Income Tax Act, which exempts bona fide bursaries and scholarships from income tax.

The Act provides that: “— any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised educational or research institution is exempt from normal tax. This exemption is, however, further subject to certain conditions where a scholarship or bursary is granted by the employer, or an associated institution in relation to the employer, to an employee or to a relative of such employee.”

At issue now are conditions under which bursaries or scholarships are provided.

Tax experts said this week that the note did not specifically deal with postdoctoral students, but these awards could be included where these payments are akin to bursaries and scholarships. It is, however, necessary to distinguish postdoctoral students from an employer-employee relationship where remuneration is paid for services rendered to the employer. The latter payments are taxable and are subject to employees’ tax (PAYE), which must be withheld by the employer.

Charles de Wet, a tax director at PricewaterhouseCoopers, said certain procedures and controls need to be in place to ensure that when a postdoctoral student receives a post-doctoral award it is to enable such a student to enhance his or her knowledge, intellect or expertise and is not for services rendered to the university.

Piet Nel, a senior lecturer in tax at the University of Pretoria, pointed out that any amendments to the Act could also affect research linked to postgraduate studies and the funding thereof.

“If a company wanted to fund research by way of a scholarship and the funding is taxed, the company may decide against it,” said Nel.

Citing another example, he said: “A university or a private company may go to an engineer who is busy with revolutionary work and tell him he could earn R200 000 — which is less than his annual salary, but acceptable if it is exempted from tax — to do postdoctoral research. Though the university and the government may benefit, the research would be taxed as if he was in normal employment despite the sacrifice he made to quit his job,” he said.

In response to these concerns Higher Education South Africa, which represents the interests of all the public universities in the country, has commissioned a study into best practices in dealing with postdoctoral students.

Nhlanhla Nyide, spokesperson for the Department of Science and Technology, said the department was in the process of setting up a meeting with Sars to discuss the matter.

He said the department would be concerned if the tax regime hampered efforts to grow South Africa’s research capacity.

A recent amendment to the Income Tax Act also affects the conditions under which employers can provide study bursaries to employees. At many universities the children of staff can study for free or at a discounted rate.

These bursaries will be tax exempt only if the employee earns R100 000 or less a year and then the tax-free amount cannot exceed R10 000 a year. Alternatively, employees may be expected to pay a reduced fee for these studies equal to at least the cost to the university of the staff member’s child’s course, failing which employees may have to be taxed on a fringe benefit.