Tax treatment of medical expenditure… explained
18 July 2012
Posted by: SAIT Technical
Issued by PKF (TaxTalk)
The on-going changes to the tax treatment of medical expenditure could leave one confused and exasperated, convinced that the deductibility of medical expenditure is far too complex to tackle. But "lest we forget” our tax system affords us as individual taxpayers only the fewest instances of tax relief on personal expenses. Therefore "getting it right” with respect to medical expenditure could hold surprisingly substantial tax savings for you!
What follows are key points to "getting it right”: a reminder of the expenditure you should be claiming and in respect of whom and the effect of the new rules introduced for the current tax year ("2013 new rules”).
As a taxpayer you may deduct from your income, your contributions to a medical scheme (registered in or outside SA) as well as qualifying expenditure which you paid but was not recovered by you from a medical scheme. Qualifying expenditure includes, inter alia:
• Payments to any registered medical practitioner, nursing home and hospital;
• Payments to any registered pharmacist for medicines supplied on prescription;
• Any amount paid in respect of expenditure incurred outside Sao n services rendered and medicines supplied;
• Any expenditure necessarily incurred and paid in consequence of any physical impairment or disability.
These expenses may be incurred in respect of yourself, your spouse, child or dependant.
For our purposes we have categorized medical expenditure into two components, namely medical scheme contributions
and qualifying expenditure, as different tax treatments apply in determining the tax relief of each component. In broad terms:
• Tax relief on your medical scheme contributions is driven by the number of your dependants. This relief is also upfront in
the form of a reduction in your monthly PAYE liability calculated on your employment income. If you are not employed this relief
will be allowed on assessment of your personal tax return.
• Qualifying expenditure does not qualify for upfront tax relief.
Its tax deductibility is only determined on assessment of your personal tax return.
How much tax relief you will qualify for will depend on your age, the number of your dependants and whether you or any dependant is a person with a disability.
Your age – here a distinction is made between taxpayers younger or older than 65 years
• If you are younger than 65 years you will qualify for tax relief on the medical scheme contributions based on the number of your dependants, while tax relief in respect of qualifying expenditure is formula based and dependent on your level of taxable income.
• If you are 65 years and older the two components of medical expenditure have the same tax treatment as you will qualify for a tax deduction for the full amount of medical scheme contributions as well as the full amount of qualifying expenditure.
Who qualifies as your dependant?
• The 2013 new rules has finally brought the definition of dependant in line with the Medical Schemes Act and means, your spouse, your child and the child of your spouse, any other member of your immediate family in respect of whom you are liable for family care and support and any other person who is recognised as a dependant in terms of the rules of the medical scheme.
• The definition of child for these purposes means (including an adopted child)
- Unmarried and not older than 18 years;
- Unmarried, above 18 years and not older than 21 years and is dependent upon you for his/her maintenance and is not liable for the payment of normal tax in his/her own right;
- Unmarried, above 21 years and not older than 26 years and is dependent upon you for his/her maintenance and is not liable for the payment of normal tax in his/her own right and is a full-time student; or
- In the case of any other child, is incapacitated by a disability from maintaining himself/herself, is dependent on you for maintenance and is not liable for the payment of normal tax in his/her own right.
Are you or any dependant a person with a disability?
• It must be impressed that substantial tax relief is afforded in instances where you, your spouse or your child is a person with a disability. It is therefore prudent to know what conditions constitute a disability and what expenditure you may claim.
• The use of the term ‘disability', which replaced the term ‘handicap', means that taxpayers can now claim for a wider spectrum of conditions. It is defined as, "a moderate to severe limitation of a person's ability to function or perform daily activities as a result of physical, sensory, communication, intellectual or mental impairment, if the limitation lasts more than a year and is diagnosed by a registered medical practitioner.”
• Historically, you would qualify for a tax deduction on the full amount of medical scheme contributions, the full amount of qualifying expenditure as well as, and this is the big one, the full amount of expenditure necessarily incurred as a consequence of a disability (the 2013 new rules, discussed below, have changed this somewhat).
• With regard to what constitutes ‘expenditure necessarily incurred as a consequence of a disability' SARS has published a list which, although not exhaustive, serves as a useful guideline of qualifying physical impairment and disability related expenses. These include, inter alia
- Salaries paid to personal care attendants;
- Cost of aids and other devices required to perform daily activities (including the cost of insurance, maintenance and repairs);
- Costs associated with special education schools;
- Capital expenses in respect of alterations or modifications to assets to make such assets accessible or usable, i.e. structural modifications to property including installation of elevators and ramps, enlarging halls or doorways lowering kitchen or bathroom cabinets to allow access, mobility and functioning within the home.
• A ‘Confirmation of disability' form ("ITR-DD”) must be completed by a registered medical practitioner every five years, or if the disability is temporary and expected to last less than five years, the ITR-DD must be completed every year.
• Where your dependant, other than your spouse or child, is a person with a disability you may claim expenditure which is necessarily incurred and paid in consequence of the disability, but you will not qualify for a full tax deduction.
• You should not confuse the terms physical impairment and disability as the terms are mutually exclusive and different tax treatments apply. SARS interprets physical impairment as, "a disability that is less restraining than a "disability” as defined…” and includes bad eyesight, hearing problems and brain dysfunctions (such as dyslexia or hyperactivity). You may claim expenditure which is necessarily incurred and paid in consequence of the physical impairment but this will not qualify for a full tax deduction.
2013 new rules
The 2011 Taxation Laws Amendment Act introduced a new system for the tax treatment of medical expenditure as from 1March 2012, with radical changes to the determination of the tax relief for medical scheme contributions.
This new system is regarded to be a more equitable method of granting tax relief than previous tax dispensations as all taxpayers irrespective of their level of income will derive an equal tax benefit on their medical scheme contributions (assuming same number of dependants). The best approach to understand this new system is to make a distinction between three categories of taxpayers, namely those younger than 65 years, those who are or their dependants are persons with a disability, and those 65 years and older.
Taxpayers younger than 65 years
• The new system affords a mixture of relief which will be granted in respect of medical scheme contributions in the form of a rebate against tax payable ("medical tax credit”), while qualifying expenditure remains claimable as a deduction against income.
• The amount of the medical tax credit, which is deductible from your tax payable, is:
- R230 per month where the contributions are made in respect of you, as taxpayer, only;
- R460 per month where the contributions are made in respect of you and one dependant;
- R460 per month plus R154 per month for each additional dependant.
• The medical tax credit is only claimable for those months in respect of which contributions are actually paid to your medical scheme; it is not refundable and can therefore not exceed the normal tax payable (after the primary, secondary and tertiary rebates); and it is a fixed amount and is, therefore, not limited to the contributions made.
• Note: this medical tax credit still affords up front tax relief but now in the form of a direct deduction from your monthly PAYE liability calculated on your employment income. Ifyou are not employed this relief will be in the form of a direct deduction from your normal tax liability determined on assessment of your personal tax return.
• The tax deductibility of qualifying expenditure is now determined as follows
- The amount of the medical scheme contributions as exceeds four times the medical tax credit
- Plus qualifying expenditure
- As exceeds 7.5% of taxable income before recognising this deduction (excluding any retirement lump sum)
Taxpayers or dependants are persons with a disability
• The aforementioned medical tax credits similarly apply to your medical scheme contributions while the tax deductibility of qualifying expenditure is now determined as follows –
- The amount of the medical scheme contributions as exceeds four times the medical tax credit
- Plus qualifying expenditure (including disability related expenditure)
Taxpayers 65 years and older
• The medical tax credit does not apply here. You will continue to qualify for a tax deduction for the full amount of medical scheme contributions as well as the full amount of qualifying expenditure.
The example will illustrate the effects of the 2013 new rules and how the tax liability for the three categories of taxpayers has been affected. Note as the medical tax credits are broadly within 30%of the previous tax-free dispensation, this new system will be more beneficial to taxpayers in the lower income brackets (e.g.30% and less) while it will be less favourable to taxpayers in the higher income brackets.
A few points to ponder with regard to the effects of the 2013 new rules on the payroll.
Employer paid contributions to a medical scheme on behalf of an employee who is 65 years and older will now be regarded as a taxable fringe benefit (as is the case for employees younger than 65 years). However, as the amount has been included in your income as a taxable fringe benefit it is deemed to have been actually paid by you and therefore, you will remain in a tax neutral position.
Employer paid contributions on behalf of an employee who has retired (due to age, ill-health or other infirmity) will continue to be tax-free as no value is attached to this benefit.
There is now a change to the base on which skills development levies ("SDL”) and unemployment insurance fund ("UIF”) contributions are calculated. This will result in an increase in the UIF contributions for employees 65 years and older and an increase in the SDL contributions for taxpayers younger than 65 years.
Changes to the IRP5 certificate codes for the 2013 tax year:
• Code 4493 (used up to 2012 tax year) is changed to code4471: Employer contributions on behalf of employees 65 years and older
• Code 4116: Medical tax credit – portion of tax credit actually applied
Now that you are au fait with the tax treatment of medical expenditure you will be pleased to know that SARS is proposing further changes for the 2015 tax year!
With the potential tax savings attached to "getting it right”, as well as the statutory requirements of correct disclosure on your personal tax return, it may be prudent to seek the advice of your tax practitioner