New medical credit system: Disadvantageous for disabled persons
04 April 2014
Posted by: Author: Sophia Brink
Author: Sophia Brink ( University of Stellenbosch)
A comparative look at the numerous amendments regarding the tax treatment of medical expenses over the last few years reveals that qualifying taxpayers will draw the shortest straw in terms of the new medical tax credit system for income tax purposes.
A taxpayer who has, or whose spouse or child has a disability (collectively referred to as qualifying taxpayers in the rest of this article for ease of reference), qualify for specific tax benefits. Before one can consider these benefits it is important to determine what is meant by the term ‘disability’. The term ‘disability’ is defined in section 18(3) of the Income Tax Act No. 58 of 1962 (Act) as a moderate to severe limitation of a person’s ability to function or do daily activities as a result of a physical, sensory, communication, intellectual or mental impairment. The limitation must have lasted or have a prognosis of lasting more than a year and must have been diagnosed by a registered medical practitioner. It is also important to note that the Act defines the terms ‘spouse’ and ‘child’ in such a way that this category is broader than one might expect.
In order for a qualifying taxpayer to qualify for these tax benefits, an ITR-DD form (available on the SARS website) must be completed. In this form a medical practitioner must confirm that the disability is a ‘moderate to severe’ disability in line with the criteria as stated in the ITR-DD for either vision, communication, physical, hearing, intellectual or mental disability.
A qualifying taxpayer could claim all qualifying out-of-pocket expenses, which include disability related expenses, in full (up until the 2014 year of assessment). SARS has determined and published a list of physical impairment or disability expenses. This list (List of qualifying physical impairment or disability expenditure in terms of section 18(1)(d) of the Income Tax Act, No. 58 of 1962) can be obtained from SARS’s website. Examples of expenditures included in the list are as follows:
The expense must be necessary for the alleviation of the limit of a person’s ability to perform the functions of daily living.
- Personal attendant care expenses;
- Travel and other related expenses;
- Insurance, maintenance, repairs and
- Aids and other devices;
- Continence products;
- Service animals; and
- Alterations or modifications to assets acquired or to be acquired.
There have been numerous amendments regarding the tax treatment of medical expenses incurred, and these changes impact the 2013 – 2015 years of assessments in different ways. These changes have a direct impact on qualifying taxpayers and can be summarised as follows:
Years of assessment preceding the 2013 year of assessment
All medical expenses incurred by a taxpayer were covered by section 18. Section 18 permitted a taxpayer to deduct from his or her income, up to certain limits, contributions made to a medical aid fund and amounts paid by the taxpayer (but not recoverable from the medical aid fund by the taxpayer or his or her spouse) to various doctors, hospitals and pharmacies (for prescribed medicine) for expenditure incurred. Section 18(1)(d) (specifically applicable to a qualifying taxpayer) also allows a deduction as part of the total section 18 deduction of ‘any expenditure that is prescribed by the Commissioner (other than expenditure recoverable by the taxpayer or his or her spouse) necessarily incurred and paid by the taxpayer in consequence of any physical impairment or disability suffered by the taxpayer, his or her spouse or child, or any dependant of the taxpayer.’ This prescribed expenditure refers to the expenditures specified in the list of qualifying physical impairment or disability expenditure. For years of assessment preceding the 2013 year of assessment, taxpayers aged over 65 (on the last day of the year of assessment) are entitled to the same allowance as a qualifying taxpayer.
2013 year of assessment (1 March 2012 – 28 February 2013) and 2014 year of assessment (1 March 2013 – 28 February 2014)
For qualifying taxpayers, the treatment has changed from a pure allowance system to a hybrid allowance and credit system. In terms of the new section 6A, contributions that are paid to a medical scheme create a set tax credit that reduces the final tax payable (thus acting as a rebate). In addition to this credit, a deduction may be claimed to the extent that the taxpayer’s qualifying medical scheme contributions (as it is specified section 18(1)(a)) exceed four times the tax credit in term of section 6A. All other qualifying medical expenses (as it is specified in section 18(1) (b)-(d)) may also be claimed as a deduction against other taxable income.
The following can therefore be claimed:
a) A section 6A monthly medical tax credit for contributions paid of –
i) R230 (for the 2013 year of assessment) and R242 (for the 2014 year of assessment) for the member;
ii) R460 (for the 2013 year of assessment) and R484 (for the 2014 year of assessment) for the member and the first dependant; and
iii) R154 (for the 2013 year of assessment) and R162 (for the 2014 year of assessment) for each additional dependant.
b) A deduction for medical scheme contributions paid (as specified in section 18(1)(a)) by the taxpayer to a registered medical scheme to the extent that they exceed four times the medical tax credit that the taxpayer is entitled to.
(c) A deduction for all of the permitted out-of-pocket and prescribed disability or physical impairment expenses as specified in section 18(1)(b)-(d).
It is important to note that this deduction is not limited to the extent that the sum of (b) and (c) exceeds 7.5 per cent of taxable income before this deduction, as is the case for taxpayers without a disability.
This treatment will change to a full tax credit system with effect from the 2015 year of assessment.
Take note that the section 6A medical scheme fees tax credit is not applicable to taxpayers over 65. A taxpayer over 65 will therefore be entitled to a full deduction of all medical scheme contributions and permitted out-of-pocket expenses.
"Taxpayers over 65 will therefore no longer be able to deduct all qualifying medical expenses and medical scheme contributions without any limitation, but will be limited according to the provisions of section 6A and 6B. A qualifying taxpayer and a taxpayer over 65 are entitled to the same credit"
2015 year of assessment (1 March 2014 – 28 February 2015)
For years of assessment commencing on or after 1 March 2014 the section 18 deduction is replaced with a section 6B additional medical expenses tax credit. Therefore a taxpayer will now be entitled to a section 6A tax credit for medical scheme contributions, and certain excess contributions and out-of pocket medical expenses will also be eligible for an additional medical expenses tax credit in terms of section 6B (instead of the section 18 deduction).
The section 6B additional medical expenses tax credit for a qualifying taxpayer, reducing the total tax liability equals: 33.3 per cent of any qualifying medical scheme contributions (as specified in section 18(1)(a)) that exceed three times the medical scheme fees tax credit in term of section 6A; and 33.3 per cent of all qualifying medical expenses (as specified in section 18(1)(b)-(d)).
The new tax credit system is applicable to all natural persons from the 2015 year of assessment, therefore including natural persons over 65. Taxpayers over 65 will therefore no longer be able to deduct all qualifying medical expenses and medical scheme contributions without any limitation, but will be limited according to the provisions of section 6A and 6B. A qualifying taxpayer and a taxpayer over 65 are entitled to the same credit.
The following example on the next page illustrates the effects of the above mentioned amendments on the 2012 to 2015 years of assessments if the same scenario is applied: A qualifying taxpayer made monthly qualifying medical scheme contributions of R1 000 (R12 000 for the year) and incurred qualifying medical expenses of R50 000.
When comparing the 2012 year of assessment with the 2013 and the 2014 year of assessment, the taxpayer with a disability is worse off for income tax purposes. The 2012 year of assessment compared to the 2015 year of assessment still indicates a greater tax reduction for a taxpayer on the 40 per cent marginal rate. A taxpayer on the 30 per cent marginal rate will have a greater tax reduction under the credit system in the 2015 year of assessment compared to the 2012 year of assessment. Even if one increases the qualifying medical scheme contributions or decreases the incurred qualifying medical expenses and vice versa in the example, the comparative results remain the same. To illustrate what the effect will be if the qualifying medical scheme contributions or qualifying medical expenses are changed in the example: Assume the qualifying taxpayer made monthly qualifying medical scheme contributions of R1 000 (R12 000 for the year) and incurred qualifying medical expenses of R20 000 (instead of R50 000). The following will be the tax reduction for each year of assessment:
From the above it is clear that qualifying taxpayers will draw the shortest straw in terms of the new medical tax credit system for income tax purposes. It is recommended that SARS reconsider whether the intention with the new medical tax credit system is aligned with the sad reality that taxpayers with disabilities will be worse-off from a tax-burden perspective.
This article first appeared on the March/April edition of Tax Talk.