Medical deduction reforms favour fixed tax credits rather than deductions

2011-07-07 00:00

CURRENTLY, tax relief in the form of deductible allowances is afforded to taxpayers for medical scheme contributions and out-of-pocket medical expenses.

For persons under the age of 65 years, contributions to registered medical schemes are allowed as a deduction from income, up to prescribed monthly capped amounts.

Where the employer makes the medical aid contributions on behalf of an employee, a fringe benefit is accounted for in the hands of the employee with a deduction of the monthly capped amounts for employees’ tax purposes.

Qualifying out-of-pocket medical expenditure, and medical scheme contributions in excess of the capped amounts, can be claimed as a deduction to the extent that the aggregate exceeds 7,5% of taxable income in the individual’s personal income tax return.

In the case of taxpayers who are either 65 years and older, a previous taxpayer, a spouse, a child, or a person with a disability, the total medical scheme contributions and qualifying medical expenditure can be claimed as a deduction.

Accordingly, there is no limit on the medical deduction for these taxpayers.

While the current regime seeks to provide relief to those taxpayers contributing to a medical scheme, as well as relief in the event of catastrophic health expenditure, it is contended that it operates to the unfair benefit of wealthier taxpayers.

The net effect of a deduction in respect of low income earners is an effective savings of 18% of the qualifying medical expenditure, whereas high income earners achieve an effective savings of 40%.

The draft Taxation Laws Amendment Bill 2011, proposes that the deduction system for medical contributions is converted into a medical tax credit system.

Under the medical tax credit system, all taxpayers will receive a tax credit for monthly medical contributions that will benefit all taxpayers equally. The value of the benefit would be unrelated to the taxpayer’s income tax bracket.

The monthly tax credit will be R216 per month for the taxpayer, R216 per month for his/her spouse, and R144 per month for each additional dependant. A supplementary credit of R216 per month is proposed for individuals over 65 years and members or their dependants with a disability.

The principle difference between a medical tax deduction and the medical tax credit is that tax credits reduce a taxpayer’s tax liability, whereas tax deductions reduce a taxpayer’s taxable income.

Lower income earners will therefore gain from this change, whereas higher income earners will benefit less than with the current deduction system.

The credit system for medical scheme contributions will be effective from March 1, 2012.

At this stage, there are no proposed changes to the out-of-pocket medical expenses but, proposals in this regard are expected in the near future.

For more information call KPMG on 033 347 7600.

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