One of the most interesting changes to taxation legislation to be implemented in the 2012/2013 tax year is the change in treatment of medical scheme contributions.
Up to now, taxpayers qualified for a set monthly deduction on their taxable income, based on their family composition. It was contended that these monthly deductions were more rewarding to wealthier taxpayers. As an example, if you pay tax at a rate of 40%, your medical tax benefit is 40% of the set deduction (R720 x 40% = R288), whereas a taxpayer with a tax rate of 18%, only receives (R720 x 18%= R129).
The new system ensures the same monetary benefit to everyone in the form of tax credits. This will operate in a similar fashion as the tax rebates afforded to individuals in that it reduces the tax payable by an individual (and not the taxable income). The tax credit amounts have been set to closely replicate the level of benefit a taxpayer in the 30% tax bracket was receiving within the 2011/2012 tax deduction system. Therefore individuals in lower tax brackets will receive slightly more than before and individuals in higher tax brackets slightly less in monetary terms.
Tax credit system for the 2012/2013 tax year
How the new tax credit system will impact employers
The employer does not get any additional benefit over the tax deduction it gets for the salary bill. The employee therefore gets the benefit of a tax credit. This change will impact payroll systems, as the tax credit will now have to be deducted from each employee’s PAYE tax amount, as opposed to reducing the employee’s taxable income as before.
Contributions made on behalf of retired employees by ex-employers (or an insurance company) remain a taxable fringe benefit.
Comparative example demonstrating different tax positions (in 2011/12 amounts)
Proposals being considered for the 2013/2014 tax year
· Taxpayers under the age of 65 – convert additional out-of-pocket medical expenses exceeding 7.5% of taxable income into a tax credit at 25% (doing away with tax deduction system)
· Disabled taxpayers or taxpayers with disabled dependants – convert additional out-of-pocket medical expenses into a tax credit at a rate to be determined
· 65 years and above – convert out-of-pocket medical expenses into a tax credit at a rate to be determined
Issued By: Bradly Howland Account Manager Redline on behalf of: Momentum Health
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