The new medical scheme fees tax credit
07 May 2012
Posted by: SAIT Technical
By RC Williams (PWC Synopsis Tax Today April 2012)
Hitherto, a taxpayer has been entitled to a deduction, up to specified thresholds, for fees paid to a registered medical scheme. Under the new system, the taxpayer is instead entitled to a fixed-amount rebate (which the legislation, perhaps confusingly, calls a credit) the quantum of which is geared to whether the fees are paid in respect of prospective benefits to the taxpayer, or to benefits for the taxpayer and one or more dependants.
The intent is to treat taxpayers equally, in that a tax credit will have the same value to all taxpayers, whereas a deduction under the old system was more valuable to taxpayers on high marginal tax rates.
However, the new fiscal system is likely to have confused many people- and certainly all those who have a hazy understanding of the technical difference between a tax "deduction”, a tax "rebate” and a tax"credit”. They may well ask what the difference is between a rebate and a credit - to which the answer is that there is no difference. They are two words which mean exactly the samething. Perhaps it is time that the Income Tax Act opted for uniformity in this regard by dropping the opaque word rebate and replacing it with the more straightforward and readily understandable expression, tax credit.
Nor will it be plain to any, except those with time on their hands to study the legislation and the official explanatory memorandum, that the new medical scheme fees tax credit relates only to fees that a taxpayer pays to a medical scheme and has nothing to do with the tax deductibility of medical expenses paid by a taxpayer to doctors, dentists and other medical practitioners.
In brief, the new "medical scheme fees tax credit” merely replaces the previous fiscal arrangement in terms of which taxpayers received a tax deduction for contributions to medical aid schemes. Under the new system, taxpayers will receive a tax credit for those contributions, up to a specified amount.
The rules regarding the tax-deductibility of medical and dental expenses outlaid by a taxpayer in respect of himself and his spouse, children and dependants, as provided for insection 18 of the Income Tax Act, remain intact, except that such expenses are now taken into accountonly to the extent that they exceed four times the amount of the medical scheme fees tax credit. The aggregate of qualifying medical expenses paid by the taxpayer is then deductible to the extent that such aggregate exceeds 7.5% of the taxpayer’s taxable income, excluding any retirement fund lump sum benefit and retirement fund lump sum withdrawal benefit.
Physical impairment or disability expenses
The Act draws a distinction between a mere medical condition and a "disability”, as defined in section 18, and provides for substantial fiscal benefits where the taxpayer, his spouse, child or dependant has a"physical impairment or disability”. In such circumstances, the taxpayer is entitled to deduct the full amount of "any expenditure that is prescribed by the Commissioner ... necessarily incurred and paid by the taxpayer inconsequence of any physical impairment or disability suffered by the taxpayer, his or her spouse or child or any dependant of the taxpayer.”
The expenditure so "prescribed by the Commissioner” is set out in Annexure B of issue 3 of the SARS Tax Guide on the Deduction of Medical, Physical Impairment and Physical Disability Expenses, which was published in October 2011.
Taxpayers who are entitled to a deduction for expenditure consequential upon a "physical impairment or disability” would be well advised to seek professional advice in order to ensure that they claim all that they are entitled to,for the wide range of deductible expenditure (which includes, in appropriate circumstances, the costof structural modifications to a residence, such as the installation of elevators and the enlargement of halls and doorways) is not generally appreciated. It should be borne in mind that, to claim the special fiscal benefits, the disability must be confirmed by a duly registered medical practitioner by way of form ITR – DD Confirmation of Diagnosis of Disability.
Entitlement to the medical scheme fees tax credit
The new medical scheme fees tax credit is available to a taxpayer who is a natural person, except for a taxpayer who already qualifies forthe age-related "over 65" rebate and is therefore already entitled to deduct all qualifying medical expenses. The new tax credit is non-refundable and is to operate in the same way as the primary,secondary and tertiary rebates under the Income Tax Act.
The medical scheme fees tax credit applies to fees paid by the taxpayer to a medical scheme registered under the Medical Schemes Act 131of 1998 or to a fund which is registered under any similar provision contained in the laws of any other country where the medical scheme is registered.
The amount of the medical scheme fees tax credit, as set out in section 6A(3) is -
R216 in respect of benefits to the taxpayer
R432 in respect of benefits to the taxpayer and one dependant·
R432 in respect of benefits to the taxpayer and one dependant plus R144 in respect of benefits to each additional dependant
for each month in that year ofassessment in respect of which those fees are paid.
Any amount that has been so paid by -
the estate of a deceased taxpayer is deemed to have been paid by the latter on the day before his death, or
an employer of the taxpayer is, to the extent that the amounthas been included in his income as a taxable benefit in terms ofthe Seventh Schedule, deemed to have been paid by the taxpayer.
For the purpose of these provisions, a "dependant” in relation to a taxpayer means a dependant as defined in section 1 of the Medical Schemes Act 131 of 1998. It is noteworthy that, for the purposes of the deduction that is available under section 18 for medical expenses, the term"dependant” is accorded a wider definition in section 18(4A).
In overview, therefore the new medical scheme fees tax credit is separate from and co-exists alongside - and does not replace - the statutory provisions for the deduction of medical and dental expenses.The medical scheme fees tax creditis solely concerned with the fiscal relief given, in the form of what would usually be called a tax rebate and is now called a tax credit, in respect of contributions paid by the taxpayer to a registered medical scheme.