New medical aid tax credits

In an effort to achieve greater equality in the treatment of medical expenses across income groups, the medical scheme contribution deduction (limited to a prescribed capped amount) is replaced by a medical scheme contribution tax credit for taxpayers under the age of 65.

This has been effective from 1 March 2012, i.e. the commencement date of the 2013 year of assessment. It will affect the calculation of employees’ tax by employers, as well as the income tax assessments of taxpayers.

From 1 March 2012 the following changes have been introduced:

• A fixed medical scheme contribution tax credit will be available to taxpayers who are members of a medical scheme and who are under the age of 65 irrespective of them having a disability:

R230 per month for contributions made by the taxpayer and R230 for the first dependant; and

R154 per month in respect of each additional dependant.
The medical tax credit is non-refundable, and cannot exceed the amount of tax to be deducted.

• The non-taxable fringe benefit in respect of medical scheme contributions paid by the employer on behalf of a taxpayer who is 65 years and older and who has not retired from that employer, has been repealed. This means that the contribution paid by an employer on behalf of such taxpayer will now be a taxable fringe benefit. This is in line with the treatment of other taxpayers. However, a person of 65 years or older is still entitled to the full medical scheme contribution paid as a deduction. The net effect on such a person’s tax due is therefore nil.

• Where a taxpayer has retired from an employer, and the employer continues to pay contributions on behalf of the retired taxpayer, the fringe benefit will still be non-taxable.

Impact

In the current tax framework, relief by way of deductions from taxable income is afforded to taxpayers for medical scheme contributions and out-of-pocket medical expenses. The new tax framework foresees the conversion into medical tax credits, the value of which will be unrelated to a taxpayer’s income bracket and are designed to benefit taxpayers with equivalent medical expenses equally and without regard to their taxable income levels.

Taxpayers will still be permitted to deduct the following out-of-pocket medical expenses:

• expenses actually paid, when such expenses have not been covered by a medical scheme, or
• expenses that appear as “claims not covered by scheme” on the medical tax certificate, and where the necessary receipts can be produced as proof of payment.

Examples of out-of-pocket medical expenses that can be deducted are:

• services rendered and medicines supplied by a registered medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist.
• hospitalisation in a registered hospital or nursing clinic.
• home nursing by a registered nurse, midwife or nursing assistant, including when supplied by any nursing agency.
• medicines prescribed by a registered physician and acquired from a pharmacist.
• medical expenses incurred and paid outside South Africa.

Taxpayers without disabilities under the age of 65

If a taxpayer is under the age of 65 years and has no disability, s/he will be granted a deduction as well as a medical tax credit based on:

• A tax credit in respect of contributions made by the taxpayer: The number of persons (dependants) for whom s/he makes contributions to a medical scheme will determine the value of the credit.
• A deduction in respect of contributions made by the taxpayer: All contributions that exceed four (4) times the medical tax credit as determined.
• A deduction in respect of contributions and out-of-pocket medical expenses (qualifying expenses) paid by the taxpayer: All contributions that exceed four (4) times the medical tax credit as determined and other medical expenditure not recoverable from the medical scheme that, in aggregate, exceeds 7.5% of the taxpayer’s taxable income (excluding retirement fund lump sum and retirement fund lump sum withdrawal benefits) before this deduction.

Taxpayers with disabilities under the age of 65

Persons with a disability (as defined) and under the age of 65 years, will be granted a credit based on:

• A tax credit in respect of contributions made by the taxpayer: The number of persons (dependants) for whom s/he make contributions to a medical scheme will determine the value of the credit.
• A deduction in respect of contributions made by the taxpayer: All contributions that exceed four (4) times the medical tax credit as determined.
• A deduction in respect of out-of-pocket medical expenses (qualifying expenses) paid by the taxpayer: No limitations will be placed on the medical expenses that may be deducted.

Disability defined

The term disability is defined in section 18(3) of the Act, viz.: “disability” means 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; and
• is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner.

A taxpayer with a disability or whose spouse or child has a disability in accordance with criteria prescribed by the SARS Commissioner, will be able to claim qualifying expenses under section 18 of the Act as a deduction from his or her income (inclusive of VAT) in full. Where the disability has not been confirmed by a duly registered medical practitioner, on the ITR-DD: Confirmation of Diagnosis of Disability, the taxpayer will not be able to claim the qualifying expenses in full and will be subject to the 7.5% limitation.

Physical impairment defined

• The term physical impairment is not defined in the Income Tax Act. However, in the context of section 18(1)(d) of the Income Tax Act it has been interpreted as a disability that is less restraining than a disability as defined. This means the restriction on the person’s ability to function or perform daily activities after maximum correction is less than a moderate to severe limitation. Maximum correction in this context means appropriate therapy, medication and use of devices.

• A taxpayer with a physical impairment or whose spouse or child or dependant has a physical impairment that is not a disability, will be able to claim qualifying expenses under section 18 of the Act as a deduction from his or her income (inclusive of VAT). The qualifying expenses will, however, only be deductible to the extent that the amount exceeds 7,5 per cent of the taxpayer’s taxable income. The term dependant in the context of section 18 of the Income tax Act means any dependant of the taxpayer admitted as a dependant under the taxpayer’s medical scheme.

Taxpayers aged 65 and older

• The medical tax credit does not apply to a person who is 65 years and older. Such persons are still entitled to the full medical scheme contribution paid as a deduction. The net effect on such a person’s tax due is therefore nil.

For more information, contact David Badenhorst, Small Business/Tax Administration Manager, Tenk Loubser & Associates, Tyger Valley, tel.021 915 6666 and e-mail david@exceed.co.za.