Reforming The Tax Treatment For Medical Schemes
01 May 2006
Posted by: TaxFind™
Reforming The Tax Treatment For Medical Schemes
In most part, these amendments have been accepted and serve to confirm government’s redistribution process to assist lower income earner s and to promote medical aid membership within lower and middle income employees.According to leading newspapers and tax magazines it would also assist in easing the burden on employees.There is, however, a big BUT.
Have we forgotten the ramifications of the budget speech delivered in February 2002 in which the Minister made certain amendments to allowances paid to employees? These included cell phone allowances, entertainment allowances, home-office allowances, home telephone allowances…The list was indefiniteand the stipulation that the individual employee was required to incur all these costs in the production of income - well, let’s not speculate as to the salary structuring that was later substiu ted by compliance audits.
In most organisations our pro-active approach to tax amendments,including our software supplies,inevitably ensure that all amendments and new codes appear on the first payslip issued in March, allowing for approximately 30 days for the sins of the past to be corrected.
When we amended Mr Jones’s package in March 2003 to remove all those allowances that no longer would result in a refund cheque from Revenue some 18 months later, did we stop to consider the fact that Mr Jones still held the same position and more importantly, still had exactly the same job description as the month before? In most instances the answer is ‘no’. What better way to confirm to SARS that we had entered into a salary sacrifice scheme and as Mr Jones no longer had any tax benefit, it would be more appropriate to revert all allowances back to cash. This would in any case be closer to the rules of the Pension/Provident Fund as the definition of pensionable salary to which the percentage contributions are applied.
In terms of SARS’s practice, a salary sacrifice would not be subject to attack, provided these arrangements are reflected in an agreement , preferably a written one,between the employer and employee entered into before the start of the new year.This change is based on the South African Constitution on grounds that there is no justification for allowing new employees greater freedom to structure their remuneration packages, compared to existing employees.
Consequently, although the employer and employee are able to structure their affairs in a manner that result in a tax benefit,Lord Tomlin in his judgement in Duke of Westminster v IRC (1953) (at 520) is noted for his interpretation: "Every man is entitled if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it other wise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioner of Inland Revenue or his fellow-taxpayers may be of his ingenuity, he cannot be compelled to pay increased tax.”Commissioner of Inland Revenue or his fellow-taxpayers may be of his ingenuity, he cannot be compelled to pay increased tax.”
We find in pract ice,however ,that the dismantling of a salary sacrifice, whether or not correct in inception, is seldom correctly implemented.The reason is normally due to time constraints. Employees are more concerned about how much additional disposable income they will receive at the end of March than about the ramifications of actions taken in the past.
Simply put, if you have entered into a salary sacrifice scheme with regard to your medical contributions and your basic cash salary decreased when the medical aid contributions increased or an additional dependant was loaded onto the medical, SARS will view an agreement of this nature as confirmation that the intention of the parties was merely to deduct premiums of this nature from your accrued (taxable) income.
Where, for example, your employer has agreed to make payments to your medical aid on your behalf, by way of a salary sacrifice, the provisions of paragraph 2(h) and 13 of the Seventh Schedule to the Act will be applied and result in a taxable liability.Should you be the employer who assisted your staff in obtaining a taxable benefit in the manners mentioned above, expect the whole liability raised by assessment to be viewed as a penalty, should you opt not to recover it from your staff.
What is the significance of these statements?
Surely the new medical amendments will not expose any invalid structuring? Please fol low the example below that clearly illustrates that the tax effect, after application of the amended capped amounts are exactly the same: Mr Jones’s medical aid contributions for himself and his two dependants are R 3 000 per month:
-Taxable fringe benefit is calculated as follows: 3000 less ((1000 for Mr and Mrs Jones)+(300 for Jnr))
- Taxable value = R 1 700.
Employer and employee pay equal contributions to medical scheme :
-The capped amount applicable to Mr Jones is R 1 300;The employer contributes R 1 500;
-Therefore the taxable value is R 1 500 (Mr Jones’s after tax deduction) and R 200 (taxable fringe benefit-par 2(4)
The employer will strive to correct the invalid or illegal salary sacrifice of the past, or alternatively purely implement the longstanding relationship that was initially agreed upon and reflected in the letter of appointment. The employee will have no objection as his medical aid is paid and he has the same tax result. SARS will smile as revised assessments for the past will increase productivity.
It is therefore imperative that all employers review their medical aid fund rules in conjunction with the practice followed by the payroll department to ensure that a noncontributory medical aid or a contributory medical aid have retained the correct status and in future the new provisions will be applied accordingly.
In closing, the debated topic of ‘dependant’ appears to have been ratified in Government Gazette number 28450 dated 1 February 2006. A dependant for contribution purposes (section 18(a)) will include any dependant as defined in section 1 of the Medical Schemes Act the spouse or par tner, dependant children or other members of the member’s immediate family in respect of whom the member is liable for family care and suppor t; or any other person who, under the rules of a me d i c a l scheme,is recognised as a dependant of a member”.
A dependant for other related medical costs in terms of (b), (c), (d) of section 18 limits a dependant to be "the taxpayer, his or her spouse or his or her children or stepchildren”.
Source : By Steve Krause (TaxTALK)