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South Africa Consults On New Medical Tax Credits

by Lorys Charalambous,, Cyprus

21 June 2011

South Africa’s Ministry of Finance has published a discussion document regarding the 2011 Budget tax announcement to reform the current medical deduction allowances by replacing them with medical tax credits.

The first phase of this reform was set out in the legislative amendments contained in the 2011 Draft Taxation Laws Amendment Bill (TLAB), published on June 2, 2011. However, the new document from the Ministry of Finance explains the underlying rationale for the entire medical reform, explains the first phase, and then focuses on the tougher questions for consideration in subsequent phases.

There is a two-phase process for public comments. Firstly, public comment for the TLAB proposals on medical scheme contributions are invited by July 22, 2011, and a second round of comments for future options by October 31, 2011, to cover the proposals in the second and later phases that are not covered in the 2011 TLAB.

At present, relief in the form of deductions from income is afforded to taxpayers for medical scheme contributions and out-of-pocket medical expenses. Medical scheme contributions by an employer on behalf of an employee are included as fringe benefits in the hands of the employee (taxpayer). 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 have an immediate family member with a disability, may deduct their medical expenses in full.

It is felt that, 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.

It is proposed that deductibility of medical expenses should be replaced by tax credits, the value of which will be unrelated to a taxpayer’s income bracket. The principle difference between the tax deduction and tax credit is that medical tax credits reduce a taxpayer’s tax liability, whereas deductions reduce a taxpayer’s taxable income. Lower income taxpayers will therefore gain from such change, whereas higher income earners will benefit less than at present.

A medical scheme contribution credit will be available to taxpayers who belong to a medical scheme, set at a fixed amount per month for the taxpayer and first dependant, and two-thirds of this amount for additional dependants, adjusted annually for inflation. In 2011/12 values, amounts of ZARR216 each a month for the taxpayer and first dependant, and ZAR144 a month for each additional dependant, are proposed.

A supplementary medical scheme contribution credit of ZAR216 a month is proposed for members or dependants aged 65 and above, and members or dependants with a disability, while the document also seeks to explore the way forward on the tax treatment of out-of-pocket medical expenditures.

Some of the key considerations, it is said, are when and how these expenses should be converted into credits; what should the phase-in period be for converting such deductions to credits; to what extent taxpayers and particularly vulnerable groups will be adversely affected by policy changes, and how these could be mitigated; and what the level of thresholds for credits should be, and what thresholds should be considered for taxpayers aged 65 years and older or those with disabilities.

The current system, by way of medical scheme contribution and expense tax benefits (deductions), cost South African Revenue Service an estimated ZAR15.7bn in 2008/09 terms. The proposals contained in this document are designed to maintain this level of tax expense benefit and seek to spread the benefit more evenly across income groups.

The Ministry of Finance has therefore explained that the underlying principle behind the proposed change is fairness, and the new system is proposed as a step towards an equitable fiscal contribution to health insurance for all South Africans. In this respect, this proposal also facilitates the longer term goal of universal National Health Insurance.

TAGS: South Africa | tax | insurance | fringe benefits | tax credits | health care | individual income tax | Africa

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