Medical Tax Credits

1. Medical Tax Credits 1 March 2012

2. Introduction In an effort to achieve greater equality in the treatment of medical expenses across income groups, the current medical scheme contribution deduction will, for taxpayers aged under 65, be replaced by medical scheme contribution tax credits. This will be effective from 1 March 2012 as announced by the Minister of Finance, Mr Pravin Gordhan, in the 2011 Budget Speech. • 2012-02-14 version 03 slide 2

3. Introduction The underlying principle behind the proposed change is fairness. The conversion of medical deductions to medical tax credits is proposed as a step towards a more equitable fiscal contribution to health insurance for all South Africans. While the current deductions regime serves both to provide relief for those taxpayers contributing to medical schemes and protects families against catastrophic health expenditure, it is inequitable in that it affords a greater benefit to higher income taxpayers for necessary services like health, through the effect of the progressive marginal rate structure. (Line Briefing Medical Scheme’s Fees Tax Credit Document) • 2012-02-14 version 03 slide 3

4. Current Framework Employees Tax The Fourth Schedule to the Income Tax Act, No 58 of 1962, currently allows an employer, when determining Employees‘ Tax payable, to take into account any contributions paid by the employee in respect of the Year of Assessment in respect of the employee, his/her spouse and any dependent of that employee as defined in section 1 of the medical schemes act. Any Medical scheme contributions made by an employer on behalf of an employee are not only included as fringe benefits in the hands of the employee (taxpayer) but are regarded as deemed contributions made by the employee. Employers are currently allowed to deduct contributions limited to the capped amount (as prescribed in Section 18 of the Income Tax Act) in respect of medical scheme contributions paid by employees under 65 years. • 2012-02-14 version 03 slide 4

5. Current Tax Framework Income Tax In the current tax framework, relief in the form of deductions from Income is afforded to taxpayers for medical scheme contributions and out-of-pocket medical expenses. Contributions to registered medical schemes are allowed as a deduction up to prescribed monthly capped amounts. Medical scheme contributions in excess of the caps, plus qualifying out-of-pocket medical expenses, can be claimed as a further deduction to the extent that they exceed 7.5% of Taxable Income. Taxpayers aged 65 and above, or who have a disability (or his spouse or child has a disability) may deduct their medical expenses in full. • 2012-02-14 version 03 slide 5

6. What has changed for Employees Tax? Effective 1 March 2012 the following changes will be introduced for medical contributions made by a person under the age of 65: • A medical scheme contribution tax credit will be available to taxpayers who belong to a medical scheme and are below the age of 65, set at fixed amounts per month. This credit is determined in terms of Section 6A of the Income Tax Act and is actually “considered” to be a rebate and as such cannot result in a refund prior to the deduction of any other Tax Credits (like Provisional Tax etc. i.e. it cannot create a loss – see Example 2). • 2012-02-14 version 03 slide 6

7. What has changed for Employees Tax? The Monthly Tax Credit amounts are as follows: • R216 each - per month for contributions made in respect of the employee and onedependant, (i.e. R216 for the employee plus another R216 for the dependant. Therefore if the employee has 1 dependant on their medical aid the medical tax credit will be R432), plus • R144 per month in respect of each additional dependant. 2. Para 2(4)(e) of the 4th Schedule has been deleted. This effectively means that the employer no longer needs to calculate the capped amount and take it into account (as a deduction) when determining the Employees’ Tax to be withheld on any Balance of Remuneration; (the medical tax credit replaces the deduction) • 2012-02-14 version 03 slide 7

8. How does the deduction of the medical tax credit work? When does the employer deduct it? The employer calculates the correct medical tax credit to take into account when determining the Employees’ Tax to be withheld. In other words, the employer determines the Balance of Remuneration by deducting all allowable deductions (Pension Contributions, Income Protector Policy Contributions, RAF Contributions, Medical Contributions for employees over 65 and Allowable Donations) from Remuneration. He then determines the Employees Tax applicable to this Balance of Remuneration by either accessing the Tax Tables prescribed by the Commissioner or by determining the Normal Tax applicable and then reducing this Normal tax by the Primary, Secondary and Tertiary Rebates. Once the Employees Tax has been determined, the employer deducts the applicable Medical Tax Credits. • 2012-02-14 version 03 slide 8

9. Employees Tax Reduction Process • 2012-02-14 version 03 slide 9

10. Example 1 Example 1: Employee under 65 Darryl (33) contributes R1 200 to his medical aid and his employer contributes R800 on his behalf. Darryl has his wife and 2 children on his medical aid scheme. Darryl has earned a salary of R25 000 for the month of April 2011. Darryl also contributes R1 800 to a pension fund. Calculate the applicable Employees Tax due on Darryl’s Remuneration. Suggested Solution: • 2012-02-14 version 03 slide 10

11. Example 2 Example 2: Employee under 65 Sanjay(39) contributes R1 000 to his medical aid and his employer contributes R600 on his behalf. Sanjay has his wife and 3 children on his medical aid scheme. Sanjay has earned a salary of R8 800 for the month of April 2011. Calculate the applicable Employees Tax due on Sanjay’s Remuneration. Suggested Solution: • 2012-02-14 version 03 slide 11

12. Does the change to a medical tax credit affect an employee over 65? No. The employer must still take all contributions into account (as a deduction) for taxpayers who are 65 years and older when determining the Employees’ Tax to be withheld on any Balance of Remuneration. However there is a change made to the Fringe Benefit calculation for a medical contribution made on behalf of an employee over 65. Change - The non-taxable fringe benefit in respect of medical scheme contributions paid by the employer on behalf of an employee who is 65 years and older andwho has not retired from that employer has been repealed. This means that the contribution amount paid by an employer on behalf of an employee who is 65 years and older and has not retired from the employer, will now be a taxable fringe benefit. • 2012-02-14 version 03 slide 12

13. Does the change to a medical tax credit affect an employee over 65? However, a person 65 years and older is still entitled to the full medical scheme contribution (including the employer’s portion) paid as a deduction. The net effect on such a person’s tax due is therefore nil. Current Treatment - A contribution made by an employer to a medical scheme on behalf an employee over 65 years of age was not allowed as a deduction in the hands of the employee. This was because in terms of the 7th Schedule, Paragraph 12A (5) (d), this contribution was a No Value Taxable Benefit (because the employee was over 65) and Section 18 (5) only deems an amount to be a contribution made by the employee IF the amount was included in the Income of the employee as a fringe benefit. Because R0 was included as a Fringe benefit R0 could be allowed. • 2012-02-14 version 03 slide 13

14. What has changed for Employees Tax? Effective 1 March 2012 – The employer contribution to a medical scheme on behalf of an employee over 65 (and the employee is still employed) would be a Taxable Benefit that DOES NOT attract a Nil Value. Please note: However, when an employee has retired from an employer, irrespective of the age of the employee, and the employer continues to pay contributions on behalf of that retired employee, the No Value Fringe Benefit still applies. • 2012-02-14 version 03 slide 14

15. Example 3 Example 3: Employee Over 65 Stanley (66) contributes R900 to his medical aid and his employer contributes R1 000 on his behalf. Stanley has his wife on his medical aid scheme. Stanley has earned a salary of R15 000 for the month of April 2011. Calculate the applicable Employees Tax due on Stanley’s Remuneration. Suggested Solution: • 2012-02-14 version 03 slide 15

16. Example 3 Current Treatment Using the same scenario as before but looking at the current tax treatment of this transaction. As you can see the addition of this legislative change actually has a tax neutral effect. • 2012-02-14 version 03 slide 16

17. How will this effect employers? Employers will be required to: • Update their payroll systems as from 1 March 2012 in order to ensure the correct calculation and deduction of payroll taxes – Employees’ tax (PAYE), Unemployment Insurance Fund contributions (UIF) and Skills Development Levies (SDL). • Inform employees of the impact of these changes on their monthly salary received. Two new source codes have been introduced as indicated in the table below: • 2012-02-14 version 03 slide 17

18. How will this effect employers? The descriptions of the two existing source codes have been modified: • 2012-02-14 version 03 slide 18

19. How Will This Affect Employees (Individual Taxpayers)? Employees may observe an adjusted net take home salary. This adjustment will be due to the medical tax credit which may impact the amount of tax withheld by the employer. Employees may therefore be required to pay more or less Employees’ Tax on a monthly basis with the implementation of the medical tax credit. The above changes will become effective from the 2013 Year of Assessment (1 March 2012 to 28 February 2013) and will effect 2013 Employees Tax Certificates [IRP5/IT3(a)] to be submitted by Employers and 2013 Income Tax Returns (ITR12) to be submitted by taxpayers during the 2013 Personal Income Tax (PIT) Filing Season commencing on 1 July 2013. • 2012-02-14 version 03 slide 19

20. What has changed for Income Tax? In this document we will attempt to explain the changes to the Income Tax legislation regarding the Medical Credits. Please note that at this stage we can only comment on the legislative changes, any changes to processes and procedures will not be covered as this legislation only affects the 2013 ITR12 submission and these procedures and processes will be defined in due time. Uncertainty seems to exist around the actual calculation of the medical deduction for a person under 65. As soon as more information regarding this calculation is released you will be informed. The same legislative changes as prescribed in the Employees Tax regime will be applicable to the Income Tax regime. • 2012-02-14 version 03 slide 20

21. What has changed for Income Tax? • Section 6A has been inserted into the Act, and refers to a “medical tax credit” (rebate). Note that the medical rebate (6A) does NOT apply to taxpayers who are 65 years and older (s 6A(1)). As with Employees Tax these taxpayers will be allowed their full medical contributions as a deduction on assessment. There is no change to the medical deduction for taxpayer’s over 65. • 2012-02-14 version 03 slide 21

22. Taxpayer under 65 – Not Disabled • Taxpayers under the age of 65 (excluding a disabled taxpayer or a taxpayer who has a disable spouse or child) may claim the following deduction/credits on assessment: • As a Rebate - Contribution is the form of a medical tax credit as prescribed under Section 6A of the Income Tax Act: • R216 each - per month for contributions made in respect of the employee and onedependant, (i.e. R216 for the employee plus another R216 for the dependant. Therefore if the employee has 1 dependant on their medical aid the medical tax credit will be R432), plus • R144 per month in respect of each additional dependant. • 2012-02-14 version 03 slide 22

23. Taxpayer under 65 – Not Disabled • As a deduction, all contributions that exceeds four times the medical tax credit as determined in section 6A and; • As a deduction, all of the usual out-of-pocket and physical impairment expenses, etc. as in the aggregate exceeds 7,5 per cent of the taxpayer’s taxable income (excluding any retirement fund lump sum benefit and retirement fund lump sum withdrawal benefit) as determined before allowing any deduction under this subparagraph. • 2012-02-14 version 03 slide 23

24. Taxpayer under 65 - Disabled • Taxpayers under the age of 65 (disabled taxpayer or a taxpayer who has a disabled spouse or child), are no longer entitled to claim the full medical deduction in respect of medical contributions. They may claim the following deduction/credits on assessment: • As a Rebate - Contribution is the form of a medical tax credit as prescribed under Section 6A of the Income Tax Act: • R216 each - per month for contributions made in respect of the employee and onedependant, (i.e. R216 for the employee plus another R216 for the dependant. Therefore if the employee has 1 dependant on their medical aid the medical tax credit will be R432), plus • R144 per month in respect of each additional dependant. • 2012-02-14 version 03 slide 24

25. Taxpayer under 65 - Disabled • As a deduction, all contributions that exceeds four times the medical tax credit as determined in section 6A and; • As a deduction, all of the usual out-of-pocket and prescribed disability or physical impairment expenses, etc.; • 2012-02-14 version 03 slide 25

26. Dependant Definition • The word dependant as discussed in Section 18 has been defined in the new Taxation Laws Amendment Act as follows: ‘‘(4A) For the purposes of this section ‘dependant’ in relation to a taxpayer means— (a) His or her spouse; (b) His or her child and the child of his or her spouse; (c) Any other member of his or her immediate family in respect of whom he or she is liable for family care and support; and (d) Any other person who is recognised as a dependant of that person in terms of the rules of a medical scheme or fund contemplated in subsection (1)(a)(i) or (ii), at the time the contributions contemplated in subsection (1)(a) were made, the amounts contemplated in subsection (1)(b) or (c) were paid or the expenditure contemplated in subsection (1)(d) was incurred and paid.” • 2012-02-14 version 03 slide 26

27. 2012-02-14 version 03 slide 27