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Simplifying The New Tax Treatment Of Medical Expenses

20 April 2012   (0 Comments)
Posted by: Author: Mahomed Kamdar
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Simplifying The New Tax Treatment Of Medical Expenses

The 2012 Budget Speech and supporting documents, tabled in Parliament on 22 February 2012, legitimise the new-approach medical expenses for taxpayers in South Africa. This new tax regime of medical credits, effective 1 March 2012, will obviously be a source of anxiety for both tax practitioners and taxpayers. This change of tax treatment affects the calculation of Employees Tax to be withheld by employers from employees (payable 1 March 2012) and the 2013 Income Tax Assessment (ITR 12). The code for the medical schemes fees tax credit taken into account by the employer for PAYE is 4116. The purpose of this article is to clarify some of the disconcerting elements of the new tax treatment of medical expenses.

Introducing the changes:

The under-65 age group:

A medical scheme contribution tax credit will be available to taxpayers who belong to a medical scheme, and are below the age of 65. The tax credit is fixed per month and is as follows:

R230 per month for contribution made by the responsible taxpayer, and R230 per month for the first dependant, and thereafter, R154 per month for each additional dependant, Tax practitioners and taxpayers are reminded that the tax credit is not refundable and cannot be in excess of the tax to be deducted.

The under-65 age group and without disability:

If the taxpayer is below 65 years of age, and suffers no disability, the taxpayer will be granted a deduction and a medical tax credit based on the following:

A tax credit in respect of contribution made by the taxpayer. This refers to the number of dependants for whom the taxpayer makes a contribution to a medical scheme and which will determine the size of the tax credits; A deduction in respect of the contribution made by the taxpayer and which exceeded four (4) times the medical tax credit as determined (in the first bullet above), and A deduction in respect of out-of-pocket medical expenses (that qualifies) paid by the taxpayer. This refers to other medical expenditure not recoverable from the medical scheme that, in aggregate, exceeds 7.5% of the taxpayer’s taxable income. It is noted that the taxable income does not include payments (or withdrawal) from retirement funds.Amount calculated as (R720 X 2) + Tax payable (incl. rebates) before tax credit)

Taxpayer + dependants TCapped deductions (1 March 2011 until 29 February 2012)
per month* per annum*
Taxpayer (1) R 720.00 R 8,640.00
Taxpayer + 1 dependant R 1,440.00 R 17,280.00
Taxpayer + 2 dependants R 1,880.00 R 22,560.00
Taxpayer + 3 dependants R 2,320.00 R 27,840.00
Taxpayer + 4 dependants R 2,760.00 R 33,120.00

*The amounts will vary depending on the number of months in the tax year that a taxpayer and dependants are members of a registered medical scheme fund.

The under-65 age group with disability :

If the taxpayer is below 65 years of age, and suffers a defined disability, the taxpayer will be granted a deduction and a medical tax credit based on:

A tax credit in respect of contribution made by the taxpayer. This refers to the number of dependants for whom the taxpayer makes a contribution to a medical scheme and which will determine the size of the tax credits; A deduction in respect of the contribution made by the taxpayer and which exceeded four (4) times the medical tax credit as determined (in the first bullet above), and A deduction in respect of out-of-pocket medical expenses (that qualifies) paid by the taxpayer. The difference, however, with the previous group (without disability) is that no limitations are placed on the medical expenses that are deductable.

The taxpaper is reminded that where disability is not confirmed by a duly registered medical practitioner on the ITR-DD Confirmation, the taxpayer will not be able to claim the qualifying expenses in full and will be subjected to the 7.5% limitation and the four times medical credit limit (See 2.1). The over-65 age group The medical tax credit does not apply to taxpayers who are 65 years and older. The elderly are better off in spending their sunset years in South Africa, because they are still entitled to a full medical scheme contribution paid as deduction.

The non-taxable fringe benefit in respect of medical scheme contribution paid by the employer on behalf of a taxpayer who is over the 65 age group and who has not retired from that employer has been repealed, thereby implying that the contribution amount paid by the employer on behalf of a taxpayer who is 65 years and older and has not retired from the employer will be a taxable fringe benefit – this is an effort to achieve greater equality in the treatment of medical expenses across all age groups. The taxpayer, older than 65 years, however, is still entitled to the full medical scheme contribution paid as deduction. The net effect on the tax due is nil. The code for PAYE purposes for the contribution paid by the employer on behalf of an employee 65 years and older (and has not retired) is 4474.

Where an employee has retired from an employer and the employer continues to pay ontributions on behalf of the retired employee, the fringe benefit will be non-taxable and the code for PAYE purposes is 4493.

Examples:

This article will have limited relevance if it is not accompanied by comprehensive examples. Below are three examples which, it is hoped, clarifies and simplifies the new treatment of medical expenses.
These examples are adapted from the SARS guide on `understanding the medical scheme fees tax credit’.

1st Example:

Mr De Klerk, is under the age of 65, earns a monthly salary of R16 040 and makes monthly contributions of:

• R937 to a pension fund,
• R2 563 to a medical scheme in respect of himself and three dependants.

Therefore Mr De Klerk, will receive an additional R303 (R 11 419 – R11 116) included in his net salary received for March 2012.

2nd Example:

Mr Erasmus, is under the age of 65, earns a monthly salary of R27 083 and makes monthly contributions of:

• R3 000 to a pension fund,
• R4 623 to a medical scheme in respect of himself and three dependants.

Therefore Mr Erasmus, will receive an additional R248 (R15 641 – R15 393) included in his net salary received for March 2012.  

3rd Example:

Mr Coetzee, is under the age of 65, earns a monthly salary of R48 750 per month and makes monthly contributions of:

• R3 656 to a pension fund,
• R5 506 to a medical scheme in respect of himself and three dependants.

Therefore Mr Coetzee, will receive an additional R221 (R 28 800 – R 28 579) in his net salary received for March 2012.

Source: By Mahomed Kamdar,Technical Advisor, SAIPA (Tax Professional)


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