As from the 2013 tax year contributions to medical aid schemes are no longer allowed as a deduction. This provision was replaced by the section 6A Medical scheme fees tax credit. Instead of allowing contributions as a deduction from taxable income, the credit is deducted from taxpayer’s liability for normal tax. The credit is in the nature of a rebate, rather than a deduction.
For the year of assessment ending 28 February 2014 the amount of the credit is equal to:
R242 per month in respect of benefits to the taxpayer;
R242 per month in respect of benefits to the first dependant;
R162 per month in respect of every additional dependant.
For a family of four the total rebate will be R808 per month. It is a requirement that the contributions are actually paid and not only payable. Contributions paid by an employer and taxed as a fringe benefit will be regarded as having been paid by the employee.
For the current year of assessment the deduction of medical expenses in addition to scheme contributions, is dealt with in terms of section 18 of the Act. With effect from 1 March 2014 this provision is repealed and replaced with the section 6B Additional expenses medical tax credit. The definition of “qualifying medical expenditure” for purposes of calculating this rebate is identical to the wording of the deleted section 18 and includes amounts paid to registered medical professionals, nursing homes and hospitals, and for prescribed medicines. Once again it is a requirement that the expenses were actually paid.
Amounts recoverable from the medical scheme are not taken into account. Expenditure necessarily incurred and paid in consequence of any physical impairment or disability suffered by the taxpayer or any dependant, is also taken into account as qualifying expenditure. The definition of “disability” remains unchanged.
If the taxpayer or one of his dependants is a person with a disability as defined, or aged 65 years or older, the rebate is calculated as follows: 33.3% of the amount by which the actual medical scheme contributions exceed three times the section 6A medical scheme fees tax credit, as well as 33.3% of the qualifying medical expenses paid by the person.
A family of four includes a person with a disability. The taxpayer’s contributions to the medical scheme for the year of assessment is R48 000. He also paid qualifying medical expenses of R12 000 and expenditure in consequence of the disability amounted to R24 000.
Section 6A rebate x 3 = R29 088
(R48 000 –R29 088) x 33.3% = R6 298
(R12 000 + R24 000) x 33.3% = R11 988
In addition to his section 6A rebate of R9 696, the taxpayer is allowed a section 6B rebate of R18 286 (R6 298 in respect of contributions and R11 988 in respect of qualifying expenses).
The basis for calculating the rebate in all other cases is completely different and best illustrated by way of an example.
The taxpayer has a wife and two children. He paid medical fund contributions of R48 000 and qualifying medical expenses of R24 000 during the year of assessment. His taxable income for the year is R240 000.
In calculating the rebate, all qualifying expenditure is taken into account. The actual contributions to the medical scheme are reduced by an amount equal to four times the section 6A rebate.
Qualifying expenditure: R24 000
Contributions: R48 000 – (R9 696 x 4) = R9 216
The rebate is limited to 25% of so much of the aggregate of the two amounts calculated above as exceeds 7.5% of the person’s taxable income.
Rebate = [(R24 000 + R9 216) – (R240 000 x 7.5%)] x 25%
[R33 216 – R18 000] x 25%
Thus, in addition to his section 6A rebate of R9 696 the taxpayer is entitled to a section 6B rebate of R3 804.
As the second rebate is calculated with reference to the person’s taxable income, lower income taxpayers benefit more. Had the person’s taxable income in the above example been R442 880 or higher, he would not have received any rebate at all.
Whether the new system is simpler or more efficient is debatable. The uniform rebate in respect of contributions will presumably ease SARS’s administrative burden. From the taxpayer’s perspective however, the requirements regarding record-keeping and proof of expenditure remain the same. For high income earners it may however not be worth the effort, as they will most likely not qualify for the second rebate.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.