Conversion of medical deductions to medical tax credits
21 June 2011
Posted by: SAIT Technical
19 June 2011
Policy discussion document for public comment.
This discussion document is published for public comment, and gives effect to the 2011 Budget tax announcement by the Minister of Finance to reform the current medical deduction allowances by replacing them with medical tax credits. Whilst this reform will be implemented in phases, it forms part of a comprehensive reform proposal – this document aims to facilitate consultation over the comprehensive proposal, and contextualises the phases for such reform.
The first phase of this reform is set out in the legislative amendments contained in the 2011 Draft Taxation Laws Amendment Bill (TLAB) published on 2 June 2011 (available on the treasury website http://www.treasury.gov.za/). Whilst these legislative amendments will be open to the normal public comment process for the TLAB, this document explains the underlying rationale for the entire medical reform, explains the first phase, and then focuses on the tougher questions for consideration in subsequent phases, including for catastrophic and out-of-pocket medical expenses. There is a two-phase process for public comments: Firstly, public comment for the TLAB proposals on medical scheme contributions are invited by 22 July 2011, and a second round of comments for future options on out-of-pocket expenses by 31 October 2011, to cover the proposals in the second and later phases that are not covered in the 2011 Draft TLAB. The key features of the present arrangements are discussed below.
Relief in the form of deductions from income is afforded to taxpayers for medical scheme contributions and out-of-pocket medical expenses. Medical scheme contributions by an employer on behalf of an employee are included as fringe benefits in the hands of the employee (taxpayer). Contributions to registered medical schemes are allowed as a deduction up to prescribed monthly capped amounts. Medical scheme contributions in excess of the caps, plus qualifying out-of-pocket medical expenses, can be claimed as a further deduction to the extent that they exceed 7.5 per cent of taxable income. Taxpayers aged 65 and above, or who have a disability or have an immediate family member with a disability, may deduct their medical expenses in full.
While the current deductions regime serves both to provide relief for those taxpayers contributing to medical schemes and protects families against catastrophic health expenditure, it is inequitable in that it affords a greater benefit to higher income taxpayers for necessary services like health, through the effect of the progressive marginal rate structure. It is proposed that deductibility of medical expenses should be replaced by tax credits, the value of which will be unrelated to a taxpayer’s income bracket.
The principle difference between a tax deduction and tax credit is that medical tax credits reduce a taxpayer’s tax liability, whereas deductions reduce a taxpayer’s taxable income. Lower income taxpayers will therefore gain from such change, whereas higher income earners will benefit less than at present. The underlying principle behind the proposed change is fairness, and the new system is proposed as a step towards an equitable fiscal contribution to health insurance for all South Africans. In this respect, this proposal also facilitates the longer term goal of universal National Health Insurance.
In proposing policy options National Treasury aims to achieve the following policy objectives: Equity and proportionality, particularly in enabling taxpayers across income groups to access healthcare Fairness Alignment with National Health Insurance objectives Affordability and fiscal sustainability Administrative simplicity
Proposals relating to Medical Scheme Contributions (for adoption in 2012)
This discussion document explains the 2010 proposals which are intended to take effect on 1 March 2012. These are incorporated in the 2011 Draft Taxation Laws Amendment Bill (available on the treasury website at www. treasury.gov.za), and comprise: A medical scheme contribution credit will be available to taxpayers who belong to a medical scheme, set at a fixed amount per month for the taxpayer and first dependant, and two-thirds of this amount for additional dependants, adjusted annually for inflation. In 2011/12 values, amounts of R216 each a month for the taxpayer and first dependant, and R144 a month for each additional dependant, are proposed. A supplementary medical scheme contribution credit of R216 a month is proposed for members or dependants aged 65 and above, and members or dependants with a disability.
In addition, this document also seeks to explore the way forward on the tax treatment of out-of-pocket medical expenditures. Some of the key considerations are: When and how these expenses should be converted into credits; What should the phase-in period be for converting such deductions to credits; To what extent taxpayers and particularly vulnerable groups will be adversely affected by policy changes, and how these could be mitigated; and What the level of thresholds for credits should be, and what thresholds should be considered for taxpayers aged 65 years and older or those with disabilities.
In order to facilitate public comment on these important issues, three options are presented in this document for illustration. A few examples of policy options are evaluated according to how well they adhere to key policy objectives.
The current system, by way of medical scheme contribution and expense tax benefits (deductions), cost the fiscus an estimated R15.7 billion in 2008/09 terms. The proposals contained in this document are designed to maintain this level of tax expense benefit and seek to spread the benefit more evenly across income groups.
Medical tax credits will be non-refundable. It is envisaged that once the proposed Risk Equalisation Fund is in place as part of National Health Insurance reform, consideration will be given to the possibility of extending the benefit of the medical scheme contribution tax credit to those who fall below the tax threshold or who qualify for credits that exceed their tax liability, subject to practicality and affordability.
The public is invited to comment on the proposals contained in the discussion document. Comments may be submitted to Suzan Papo at email address email@example.com
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