Who gets the credit: medical tax credits explained
30 July 2012
Posted by: SAIT Technical
By Danielle le Roux and Andrew Seaber (DLA Cliffe Dekker Hofmeyr Tax Alert)
Effective 1 March 2012, the new medical tax credit system (credit system), under the Income Tax Act, No 58 of 1961 (Act), applies to persons below the age of 65 years. The medical tax credit is a fixed monthly Rand amount that will be offset against tax payable. The rationale behind this system is to address the disparity in medical deductions available to persons falling into different income categories. This is achieved by ensuring that each person in the same category (over 65, under 65, under 65 with a disability), receives exactly the same number of fixed credits for medical aid deductions on a monthly basis. The number of credits received will be upwardly adjusted on an annual basis. The previous 'deduction' system will still apply to persons over the age of 65 years.
The question that arises is how a tax deduction and a tax credit differ. If one considers that a tax deduction reduces the taxable income of a person, this means that one's tax payable is calculated on a smaller amount, thus reducing the amount on which tax is calculated. Conversely, a tax credit is rather like a tax rebate, which is deducted after your tax payable has been calculated, thus reducing the amount of tax you pay.
The Explanatory Memorandum on the Draft Taxation Laws Amendment Bill, 2012 has recently introduced further amendments to s6A of the Act as well as an additional new section, s6B. Section 18 has been removed. These amendments are aimed specifically at the taxation of additional qualifying medical expenses and the conversion of these to medical tax credits under the credit system.
Currently, the credit system provides that a taxpayer under 65 will receive a monthly tax credit of R230 for the taxpayer and a further R230 in respect of his/her first dependent. In respect of each dependent thereafter the taxpayer will receive a monthly credit of R154. Any qualifying medical expenses not covered by medical aid, will receive an additional tax credit. This additional credit will depend on whether the taxpayer's medical aid contribution makes provision for a person with a disability or not. Where the taxpayer or one of his/her dependents is disabled, the taxpayer will receive:
The standard monthly medical scheme tax credit for the taxpayer, spouse and dependents;
an additional credit for 33.3 per cent of medical scheme fees in excess of three times the value of the standard tax credit calculated; and
a credit for 33.3 per cent of all qualifying medical/out-of-pocket expenses.
Where there is no disability factor and the taxpayer is under the age of 65 years, he/she will receive:
the standard monthly medical scheme tax credit for the taxpayer, spouse and dependents; and
a credit for 25 per cent of the amount by which (X+Y) exceeds 7.5% of the taxpayer's taxable income (R200,000 x 7.5% = R15,000. Thus 25% of (R20,000 + R5,000) = R6,250 credit).
X: equals the amount by which the actual amount of medical scheme fees paid by the taxpayer in a year exceeds four times the standard medical scheme credits (eg R5,000); and
Y: equals all the annual qualifying expenses (eg R20,000).
These proposed amendments, if introduced, will be effective in respect of contributions made or other medical expense incurred in the years of assessment commencing on or after 1 March 2014.