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Medical Aid Deductions And Tax Credits

04 October 2011   (0 Comments)
Posted by: TaxFind™
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Medical Aid Deductions And Tax Credits

Health Care costs have been a focus point for some years now. We all know that health care and private medical aid costs are significant and constantly on the rise. It’s clear that government will be ploughing ahead with a National Health Insurance (NHI) reform, regardless of the concerns regarding sustainability and affordability. How the NHI will be funded is still a hotly debated issue, as South Africa has a disproportionate number of individuals that should be catered for,but only a small handful of taxpayers and employers to fund such.Following the Minister of Finance’s announcement, there has been a discussion document published for public comment, as well as initial legislative changes contained in the 2011 Draft Taxation Laws Amendment Bill.

The current system allows for a deduction from tax with regards to contributions to medical schemes as well as deduction of out-of-pocket expenditure when significant, for disabled persons and the elderly. However, it is argued that the current deduction regime affords a greater benefit to higher income taxpayers. I’m not convinced that the higher income taxpayer generally will benefit significantly as the greater your income, the higher the qualifying threshold for the tax deduction. Also, a deduction has a diluted effect on the value of tax saved.

It was proposed that the tax deduction of medical expenses be replaced by tax credits, which provides for the same value to be attributed regardless of the taxpayer’s income bracket. The main difference is that a tax credit reduces a taxpayer’s tax liability, where as a deduction reduces the taxpayer’s taxable income. The motivation for the proposed change is fairness, and the new regime form part of the shift towards an equitable fiscal contribution to health insurance. The Bill is proposing the following in respect of the new Medical Tax Credit:

• Medical scheme contribution credit with regards to taxpayers who belong to a medical scheme, set at a fixed amount of:

R216 per month for the taxpayer;

R432 per month for the taxpayer and first dependant,

R432 per month for the taxpayer and first dependant,

R144 in respect of each additional dependant.

• Supplementary medical scheme contribution credit of R216 per month for members or dependants with a qualifying disability, or aged 65 and older.

The medical tax credit values will be adjusted annually for inflation. A ‘dependant’ in relation to a person will be defined as:

• His or her spouse;

• His or her child and the child of his or her spouse;

• Any other member of his or her immediate family in respect of whom he or she is liable for family care and support.

• Any other person who is recognised as a dependant of that person in terms of the rules of a medical scheme or fund at the time the expense was incurred.

A ‘disability’ will be defined as a moderate to severe limitation of a person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment, if:

• The limitation has lasted or has a prognosis of lasting more than a year.

• Is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner.

The Bill fails to address the tax treatment of out-of-pocket medical expenditure. However, the discussion document that was published for public comment does explore the possible way forward with regards to out-of-pocket medical expenditure. The document addresses the following key issues:

• When and how these out-of-pocket medical expenses should be converted into tax credits;

• What transitional period for converting such expenses to tax credits should be provided;

• What will the adverse affect be with regards to the taxpayer, and particularly the vulnerable groups, and how could such be mitigated.

• What would be the threshold levels for tax credits (considering persons with disabilities and persons aged 65 and older).

The medical tax credit will not be refundable. However, it is implied that once the proposed Risk Equalisation Fund is in place as part of the NHI reform, the benefits of the medical scheme contribution tax credits could be extended to those persons that fall below the tax threshold or where the qualifying tax credits exceed that person’s tax liability.

There are some concerns as to how out-of-pocket medical expense tax credits could be administered, considering that not all taxpayers are required to file an annual tax return with SARS. This administration burden may be passed on to the employer. It is anticipated that the proposed medical scheme contribution tax credit regime will come into effect 1 March 2012.

Source: SAIPA (Tax Committee)


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