Medical tax credit replaces cap amount

Some changes have been announced to the medical tax credit coming into effect 1st March 2012, where the medical aid capped deduction amount will fall away and will be replaced by a medical scheme fees tax credit applicable to all taxpayers other than those aged 65 or more.

This is according to Ron Warren, tax expert and executive chairman of payroll software company NuQ, who says that a tax rebate will be granted, instead of a capped deduction of medical aid contributions that is deducted from taxable income.

“The reason for this is stated to be that the medical cap amount is more favourable to high earners than low earners,” Warren explains.  “To a person paying tax at the marginal rate of 40% a cap amount deduction will be worth 40% of the deduction, whereas for a person paying tax at 18% the deduction will be worth only 18% of the deduction.”

Warren says that this is regarded as unfair, in that the allowance should result in the same tax saving for rich as for poor people, which is achieved by the tax credit, which is a deduction from tax (ie a tax rebate).

The tax credit

The tax credit is applicable to all taxpayers other than those aged 65 or more.  “That is, it does not apply to a person who is entitled to the old age rebate,” he says.  “The reason for this is the same as the cap amount not being applicable to such a person, who is allowed to deduct medical aid contributions from taxable income.” 

He continues that the tax credit is applicable where a medical aid contribution is paid by the taxpayer (other than those aged 65 or more).  The amount of the credit is – R216 for the contributor; R216 for the first dependant; and R144 for each further dependant for each month for which those fees are paid. 

“This is the same basis as used for the medical cap amount, so the logic of the calculation of the amount of the benefit will not change,” he says. “All that will change will be that the result will be deducted from tax payable instead of from taxable income.”

Warren explains that any medical aid contribution paid by the employer is a taxable fringe benefit, and is deemed to have been paid by the employee, the same as it is at present, except that now this applies to employees aged 65 and more as well.

Tax calculation for PAYE purposes

The only change required to be made in a company’s payroll programs is in the tax calculation.  “Instead of deducting the cap amount from income, the tax credit will be deducted from tax,” he says.  “The annual tax credit will be the tax credit annualised by whatever method of annualising is used for the employee.”

Medical aid contributions

The full medical aid contributions paid by or deemed to be paid an employee aged 65 or over on the last day of the tax year must still be deducted from that employee’s taxable income, the same as it is at present. This compensates the employee for not being given a tax credit.

As stated earlier, medical aid contributions paid by the employer for a person aged 65 or more are now treated as a taxable fringe benefit, the same as for employees aged less than 65.  These contributions are deemed to have been paid by the employee.

No medical aid contributions paid by employees aged less than 65 may be deducted from taxable income for PAYE purposes. Previously, they were allowed to deduct contributions up to the cap amount, but that has now been replaced by the tax credit. 

Disabled employees

Disabled employees are not entitled to any extra medical tax credit. However, on assessment they are instead allowed to deduct all medical expenses incurred, including some medical aid contributions, as explained below.

This does not affect employees’ tax.  As in the past, payrolls do not need to take any special action in respect of disabled employees.  They will only be able to claim their full medical expenses as a tax deduction on assessment.

Medical expenses on assessment

Taxpayers who are aged 65 and over can claim all medical expenses incurred and all medical aid contributions paid.

Taxpayers who are disabled or who have a disabled dependant may claim the total of all medical expenses and other expenses directly linked to the disability, plus so much of their medical aid contributions as exceeds four times the medical tax credit they have received.

Taxpayers not falling into either of the above categories can claim the total of so much of their medical aid contributions as exceeds four times the medical tax credit they have received, plus all other medical expenses incurred. From this total is deducted 7,5% of their taxable income.

It can be seen that an assumption is made that the marginal rate of tax applicable to the taxpayer is 25%, and the medical aid contributions which have resulted in the medical tax credit are therefore 4 times the value of the medical tax credit.  The medical aid contributions allowed as a deduction on assessment are accordingly reduced by this theoretical value.

(Press release NuQ, November 2011)

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