Taxpayers 65 and older may claim all qualifying expenditure
Taxpayers under 65 are not taxed on, or may deduct, monthly contributions to medical schemes up to R530 for each of the first two dependants on their medical scheme and R320 for each additional dependant. In addition they can claim a deduction for medical scheme contributions above the caps and any other medical expenses limited to the amount which exceeds 7,5% of taxable income
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Taxpayers under 65 may claim all qualifying medical expenses, where the taxpayer or the taxpayer’s spouse or child is a handicapped person.
The tax treatment of medical scheme contributions and other medical expenses
An explanation on how the revised tax dispensation with respect to medical scheme contributions and other medical expenses will affect you.
November 2005, National Treasury, South Africa
1. Taxpayers 65 years and older and retired individuals
It is important to note that taxpayers older than 65 years will continue to be able to deduct all medical scheme contributions and other medical expenses from their taxable income. Also, individuals who took early retirement but still enjoy medical scheme coverage paid for by their former employers, will continue to enjoy this as a tax-free benefit.
2. Taxpayers 65 years or younger
Three types of medical expenses qualify for preferential tax treatment:
a) Contributions to medical schemes
Members of a medical scheme can make contributions to the medical scheme themselves, their employers can make the contributions or contributions can be split between an employee and the employer.
In terms of current legislation, only the employer contribution will qualify for some preferential tax treatment (i.e. there will be no taxable value placed on the employer contribution to the extent that it does not exceed 2/3’s of the total contribution). The member making medical scheme contributions out of his1 own pocket will not be entitled to the same preferential tax treatment for such contributions.
In terms of the new legislation, all (i.e. 100% of) contributions will qualify for preferential tax treatment irrespective of who makes the contribution. This preferential tax treatment will be limited to a monetary amount of R500 for each of the first two beneficiaries and R300 for each additional beneficiary. The existing “2/3 rule” falls away.
b) Medical expenses paid by individuals (including medical scheme contribution paid by the individual)
Medical expenses paid for by the taxpayer in excess of 5 per cent of his income, are tax deductible. This threshold will increase to 7,5 percent from 1 March 2006 and will exclude medical scheme contributions which qualifies as a tax deduction under a). Where a taxpayer has a disability or has a dependant with a disability all medical expenses of the family unit will continue to be tax deductible.
c) Employer provided medical treatment
Currently, no taxable benefit will arise for the employee where the employer provides
medical treatment to employees at their place of work. Such medical treatment is normally covered under a company’s occupational health initiative. However, should the medical treatment be provided to employees’ families, employees would be liable to pay tax on the value of this benefit. Where the employer pays for medical treatment for the employee and/or his family and this treatment is provided at a place other than the employee’s workplace, the employee will have to pay tax on the value of this benefit.
In terms of the new tax dispensation, all benefits derived from employer provided medical treatment (on- and off-site) will be tax-free in the hands of the employee, provided certain criteria are met. Only Prescribed Minimum Benefits may be provided tax-free at an off-site location. In cases where the off-site employer provided medical treatment constitutes the business of a medical scheme it must be granted exemption from complying with the requirements of a medical scheme by the Registrar of Medical Schemes in order to qualify for tax-free treatment. Where the off-site medical treatment does not constitute the business of a medical scheme it may be provided tax-free if it is only provided to employees (or their immediate dependants) who are not members of a medical scheme.
3. Who qualifies as a dependant?
The Income Tax Act was amended to include a definition of dependant for purpose of
medical scheme contributions. The new definition is in line with the definition of dependant in the Medical Schemes Act and recognises the fact that an individual may want to extent coverage to persons other than his immediate family. Medical scheme contributions made by the taxpayer to cover his parents or other persons in his care will qualify for preferential tax treatment.
However, in the case of out of pocket medical expenses only expenses incurred in respect of immediate family members i.e., spouses and children will qualify for preferential tax treatment. This more restrictive definition also applies to employer provided treatment and is aimed at limiting abuse and to favour wider medical scheme coverage.
Examples
Example 1:
Raeefah is employed and her employer pays two-thirds of her medical scheme contribution. Her husband is also on her medical scheme. The total medical scheme contribution for her and her husband is R1800. Currently she is being taxed on only the R600 of her own contribution, as her employer’s contribution is tax deductible. However, after March 2006, the total tax deductible amount for her and her husband will be R1000 (R500 X 2), which means she will have to pay tax on an additional amount of R200 every month.
Example 2:
Chris is single and his employer pays two-thirds of his hospital plan contribution of R600 per month. Up until now, the employer has paid R400 per month, and Chris R200. He was taxed on the amount of R200. Under the new legislation, he will only be taxed on the amount over R500, namely R100, as the maximum amount deductible from tax has now been set at R500.
Example 3:
Mandla is employed and his employer pays two-thirds of his medical scheme contribution. His wife and two children are also members of the scheme. His total membership contribution is R3 000 per month, R2 000 of which is paid by his employer. Up until now, Mandla has been taxed on his own contribution of R1 000. However, he will now only be able to deduct R1 600 for purposes of tax deduction (R500 per adult X 2, plus R300 per child X 2). He will now be paying tax on a contribution of R1400 per month (R3 000 - R1 600 = R1 400).
Example 4:
Sandra's monthly medical scheme contribution is R1 500, of which her employer pays R1 000. She is currently taxed on R500 per month. However, under the new legislation, the maximum amount that is tax deductible, is R500. So she will now be paying tax on R1 000 per month, instead of on R500.
High medical expenses still tax deductible
However, all medical expenses in excess of 7,5% of her total income for the year, will also be tax deductible. For example, if her income for the year is R100 000, she will be allowed to deduct medical expenses that exceed R7 500 from her taxable income. If she paid R12 000 out of her own pocket for medical expenses, she will be able to claim for R12 000 – R7 500 = R4 500.
Medical scheme tax benefit capped
The South African government has reformed the tax treatment on medical aid cover to encourage broader medical scheme coverage, extend the tax benefit to self-employed individuals and achieve more equitable tax treatment, according to South African Finance Minister Trevor Manuel. Manuel was presenting the South African government's 2005-06 Budget to Parliament on Wednesday.
Two-thirds tax-free benefit to be capped
The current tax treatment of medical scheme arrangements allows an employer to pay two-thirds of the members' contribution as a tax-free fringe benefit.
This has the effect that the fiscal benefit, expressed as the tax-reduction in the price of medical scheme membership rises from nil for individuals below the tax threshold to 26.7% for those taxed at the maximum marginal rate of 40%.
The government is proposing that the two-thirds tax-free provision should be replaced by a monthly monetary cap that takes into account the number of beneficiaries covered by medical scheme membership.
This in effect provides complete tax relief for more affordable medical aid packages for low and middle-income families, while restricting benefits for more expensive packages.
This will take effect from March 1, 2006. (I-Net Bridge)
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