24 June 2011

Medical tax credits

The National Treasury released the Tax Policy Discussion Document for public comment on 17 June 2011, dealing with the conversion of the current system of medical aid deductions to the proposed system of medical tax credits. This issue was raised in the Minister of Finance's budget in February, and the discussion document is the Treasury's method of consulting with the public. In essence, the current system of getting a deduction for your medical aid scheme contributions, which is currently capped (at R720 per month for each of the first two dependants and R440 for each additional dependant) will move to a system where if the system had been implemented in the 2011/2012 fiscal year, would be set at a fixed amount per month for the taxpayer and the first dependant, and two thirds of that amount for each additional dependant, which would be R216 per month for the taxpayer and the first dependant, and R144 per month for each additional dependant. These amounts will be adjusted annually for inflation.

There will be a supplementary medical scheme contribution credit of R216 per month for a member or dependant aged 65 and above or with a disability.

The essential issue that will flow from the introduction of this legislation will be that commencing on 1 March 2012, the medical aid contribution will no longer be eligible for a deduction from the taxpayer's income in terms of Section 18. This credit will act like a rebate when the taxpayer files his tax return in or about August 2013. When the taxpayer is given his assessment by SARS, the accumulated credits for his family for the fiscal year ended 28 February 2013, will then be akin to a rebate on his tax liability. Government says that it is driven by a need to make tax relief equitable across income groups, and fair in proportion to the average direct government spending on health services for people who do not have medical scheme coverage. They also want to adapt the tax relief for medical expenditure to support the phasing in of national health insurance. One of the most relevant paragraphs on page 13 of the document, in the writer's view, says that based on public expenditure on health services of R78 billion on 2008/09, this amounts to R1,600 per year per person, or R1,950 per year for South Africans who are not covered by medical scheme membership. The present tax relief deductions, expressed as a tax forgone per medical scheme beneficiary, amounted to an estimated R1,600 per person in that fiscal year. The proposed medical scheme contribution credit is based on being broadly equivalent to the present medical scheme contribution deduction for taxpayers in the 30% marginal tax rate bracket (ie earning between R235,000 and R325,000 in this fiscal year). The Treasury estimates are that a contribution tax credit equivalent to about 22% of the current capped amounts would have a similar overall cost to the fiscus as the present deduction, so that in aggregate for the majority of taxpayers, the proposed tax credit brings greater tax relief than the present arrangement.

The Treasury are seeking comments on their paper and the deadline for comments has been extended to 22 July 2011.

The discussion paper deals further with the mechanics of replacing the current tax deduction system with the tax credit system for medical expenditure which exceeds a particular threshold of taxable income. This is a complex fiscal tool, and it appears that Treasury are considering a credit say at 25% of such excess expenditure above the threshold. As they say, this is by design a redistributive tax measure in that for the same quantum of medical expenses in a year of assessment, the medical expenses tax credit declines as a percentage of taxable income with rising income (at page 19). This is clearly a complex proposed change to the tax system, and in respect of the medical expenses, at this stage Treasury wishes to have further consultation and input. They will move to implement the new tax credit system in the 2013 fiscal year, but the current system on deductibility of medical expenses will continue for the time being.

Alastair Morphet

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