Additional medical expenses converted to medical tax credits - Proposed introduction of section 6B
04 April 2013
Posted by: Author: Chris Basson
Source: Chris Basson
As promised to regular readers of our publication this article will be the final instalment of our three week series in which we cover the proposed introduction of section 6B into the Income Tax Act and how it affects each category of taxpayer. This week is no exception as this article will be focusing on taxpayers under the age of 65 years with a disability factor.
Following is a quick summary of the reason why the tax credit system was introduced. In 2011, the system of deductions for medical scheme contributions was converted to credits in an attempt to improve the equity of the tax system. This conversion was based on the notion that medical tax credits provide a more equitable form of relief than medical deductions because the relative relief does not increase with higher income levels. The proposed amendments with regard to section 6B encompass phase two of the changes.
Taxpayers below 65 years of age who have a disability or whose spouse or child has a disability, fall into a special category. These taxpayers are entitled to a deduction of all qualifying medical expenses as well as the value of the medical scheme contributions that in aggregate exceed 4 x the credit allowed for medical scheme contributions. In terms of the Draft Explanatory Memorandum on the Tax Laws Amendment Bill which was released on 5 July 2012, the proposal is that the remaining aspects of the deduction system for medical expenses (section 18) be replaced with the tax credit system (section 6B) in respect of all medical scheme contributions and qualifying medical expenses for all taxpayers.
Under this system, a set level of credits will be allowed for medical aid contributions (with annual upward adjustments), with certain excess contributions and out-of-pocket expenses also eligible for tax credits (instead of deductions). All credits will remain non-refundable. Like the current system for deductions, application of the tax credit system will fall into three categories: (i) taxpayers of age 65 and above, (ii) taxpayers with a disability factor under the age of 65 and (iii) all remaining taxpayers.
Taxpayers below 65 years of age (with a disability factor)
Similar to current law, a separate calculation exists for taxpayers below 65 years of age if the taxpayer, his/her spouse or child is a person with a disability. Contrary to the standard monthly medical scheme credits, the section 6B credits will generally be set at 33.3 per cent. More specifically the medical credits will be calculated as follow:
- The standard monthly medical scheme credits for the taxpayer, spouse and dependants; ADD
- 33.3 per cent credits for medical scheme fees credits that exceed three times the standard medical scheme credits;ADD
- 33.3 per cent credits for all qualifying medical expenses (other than medical scheme contributions).
An example is provided to illustrate how to calculate the medical credits for a taxpayer less than 65 years of age with a disability factor.
Tammy is 31 years old. For the year of assessment commencing on 1 March 2014 she made contributions to a medical scheme of R 2 000 per month on behalf of herself and her two children. Her daughter, Melanie is disabled. By 28 February 2015, she had incurred R 20 000 in qualifying medical expenses.
Type of deduction
Value of credit
Standard monthly medical scheme credits
R2000 p.m. x 12= R24000 p.a.
(R242 + R242 + 162)= R 646 p.m.R 646 x 12
R 7 752 p.a.
Excess medical scheme fees
(R 24000 - (3 x R 7752))=R 744R 744 x 33.3%
R 248 p.a.
All qualifying medical expenses
R 20 000
R 20 000 x 33.3%
R 6660 p.a.
R 44 000
R 14 660 p.a.
Therefore, Tammy’s tax liability
for the 2014/2015 tax year would be reduced by R 14 660.
To conclude on this article and
this series of articles, all taxpayers will be affected by the proposed
introduction of section 6B will be introduced on 1 March 2014. I believe that
the amendments with regard to medical scheme fees tax credits have truly
levelled the playing field for all taxpayers. It has provided a way in which
equality can be reached between high and low income earners without providing
one with a profound advantage. I truly hope that these articles have provided
you and your clients/organisations with a clearer understanding of these
amendments. Until we meet again.
List of References
2012. Explanatory Memorandum On The Taxation Laws Amendment