A healthy lifestyle vs. budget blues

 

On 27 February 2013 finance minister Pravin Gordhan will step to the podium to present the country’s 2013/14 National Budget. Individual and corporate taxpayers will cast a watchful eye on proceedings to assess the likely impact of the tax changes on their respective budgets.

What can taxpayers expect as “Budget Day 2013” draws near? One of the major healthcare talking points is government’s proposed National Health Insurance (NHI) system.

“We are continuously monitoring developments around NHI and will make the necessary scheme changes to ensure the relevance of our product offering to our members,” says Johan Lombard, an actuarial specialist at Momentum Health. “We do not expect any major developments that might threaten the existence of medical schemes this year”.

Some market commentators suggest that Gordhan may announce some form of wealth tax on the country’s super-rich, but Lombard believes it is more likely for Treasury to extract higher taxes from top income earners by means of small tweaks to the current system.

The medical schemes environment offers up some prime examples of how the overall tax burden can be shifted from lower to higher income earners without undue stress. In the 2012/13 tax year, for example, Gordhan announced significant changes to the tax treatment of medical schemes contributions.

Under the old system taxpayers qualified for a set monthly deduction on their taxable income based on their family composition. The new system ensures the same monetary benefit to everyone in the form of tax credits. Momentum Health expects that Gordhan will raise the threshold for the medical scheme tax credit in line with inflation next Wednesday.

“The most significant change in the 2013/14 budget could stem from last year’s proposal that a percentage of taxpayers’ out-of-pocket medical expenses be converted into a tax credit too,” says Lombard. “The impact will be similar to the change in treatment of scheme contributions in that those that earn above the 30% tax threshold will be taxed a bit more and those below a little less”.

We can illustrate the impact of this proposal by way of an example. Let us assume that Joe Average earns R600 000 per annum, is taxed at 40% and incurs R100 000 in additional medical expenses (defined as qualifying medical expenditure that is not covered by a medical scheme).

Under the existing tax regime Joe is entitled to a tax deduction for every rand in additional medical expense that he incurs exceeding 7.5% of his gross salary – anything he spends in excess of R45 000 (R600 000 x 7.5%). He therefore receives financial benefit of R22 000 (40% x R55 000).

On the proposed tax credit system Joe will in all likelihood get a tax credit in the region of R16 500 – R55 000 x 30%, based on the assumption that the tax credit system on additional medical expenses replicates that of the tax deduction system at 30% presently.

There are few workarounds or loopholes available to individual taxpayers to reduce their tax burden. As far as the treatment of medical scheme contributions and additional medical expenditures go, Momentum Health urges taxpayers to ensure that accurate records of all uncovered medical expenses are kept. They should also ensure that their medical scheme ‘fits their healthcare needs.

“Because the tax credits are fixed in nature, individuals can benefit by selecting more cost-effective options within their medical schemes that still meet their healthcare needs,” says Lombard.

Far and away the smartest way to reduce medical expenses is to look after your health. “Any investments in your health today – through healthy eating and exercise – will be of great emotional and financial benefit over the long term”. A healthy lifestyle will counteract the erosion of your take home pay due to budget changes as well as reduce government’s healthcare provisioning burden.

 

Issued by Draft FCB Redline on behalf of Momentum Health