New Medical Tax Credits Guide
12 November 2012
Posted by: Author: Carin Grobbelaar
New Medical Tax Credits Guide
A look at who qualifies
Changes to the treatment of medical expenditure were introduced by the Taxation Laws Amendment Act No 24 of 2011, which was promulgated on 10 January 2012.
Effective from 1 March this year, monthly deductions for contributions to medical schemes will in future be converted to tax credits, the value of which would be unrelated to a taxpayer's income bracket. Medical scheme contributions by an employer on behalf of an employee are to be included as fringe benefits in the hands of the employee (taxpayer). The simplest way to understand the new system is by distinguishing between those taxpayers under the age of 65 and those aged 65 and older.
For taxpayers under the age of65, there will be a mixed system in which relief will be granted for medical scheme contributions by means of a rebate against tax payable (called a ‘medical tax credit'), while other qualifying medical expenses will be claimable as a deduction against taxable income, subject to a formula, which may limit the extent of the deduction depending on the level of the taxpayer's taxable income. Since the medical tax credit is a fixed amount, it will have no tax effect, whether the contributions paid are more or less than this amount. The rationale behind the change as being the need to remedy a previously inequitable treatment of medical expenditure, which favoured the higher income taxpayers for an essential service like health, through the effect of the progressive marginal rate structure.
The fixed amount of the medical tax credit, which is deductible from the person's normal tax payable, is R230 per month where the contributions are made in respect of the taxpayer only, R460 per month where the contributions are made in respect of the taxpayer and one dependent; and R460 / month plus R154 / month for each additional dependent.
Taxpayers 65 and older will continue to claim both medical scheme contributions and other qualifying medical expenses, without limit, as a deduction against taxable income. These taxpayers do not qualify for the medical tax credit.
Medical expenses that qualify for this deduction include: the amount by which medical scheme contributions made by the taxpayer exceed four times the medical tax credit, payments to medical practitioners, nursing homes and hospitals, payments to pharmacists for prescribed medicines, payments for physical disabilities, including remedial teaching and expenditure incurred for mentally handicapped persons.
The new tax regime consequently has some PAYE implications for employers. The full contributions made by an employer to an employee's medical scheme must be taxed as a fringe benefit in the hands of the employee.
However, where such an employee is aged 65 or older, for purposes of calculating PAYE the employer must deduct any contributions made by the employee to a medical scheme. This deduction includes contributions paid by the employer that are taxed as a fringe benefit and are therefore deemed to be paid by the employee.
For taxpayers under the age of 65, the employer must deduct the applicable medical tax credit from the amount to be withheld as PAYE.
Source: By Carin Grobbelaar (Taxbreaks)