Johan Lombard, Actuarial Specialist, Momentum Health
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
|
Taxpayers under age 65 |
Taxpayers 65 years and older |
|
Medical scheme contributions · Monthly tax credit of R216 for taxpayer and first dependant · Additional tax credit of R144 for each additional dependant |
Medical scheme contributions · All contributions remain fully deductible (leaving taxpayer in neutral position) |
|
Out-of-pocket medical expenses · Medical scheme contributions in excess of 4 times the tax credit PLUS any other out-of-pocket medical expenses above 7.5% of taxable income · Approved expenses fully deductible for disabled dependants (or if taxpayer disabled) |
Out-of-pocket medical expenses · Any additional medical expenses also fully deductible |
* These values are as communicated by National Treasury on 7 September 2011 and might change with the budget speech on 22 February 2012
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)
|
Family of four (under age 65) |
No medical aid |
Medical aid: tax deduction |
Medical aid: tax credits |
||||||
|
Annual taxable income (Inc) |
150 000 |
320 000 |
640 000 |
150 000 |
320 000 |
640 000 |
150 000 |
320 000 |
640 000 |
|
Marginal tax rate |
18% |
30% |
40% |
18% |
30% |
40% |
18% |
30% |
40% |
|
|
|||||||||
|
Annual medical aid contribution |
0 |
0 |
0 |
27 840 |
27 840 |
27 840 |
27 840 |
27 840 |
27 840 |
|
Additional healthcare expenditure |
20 000 |
40 000 |
60 000 |
20 000 |
40 000 |
60 000 |
20 000 |
40 000 |
60 000 |
|
|
|||||||||
|
Annual tax without medical aid (T1) |
16 245 |
62 995 |
181 495 |
16 245 |
62 995 |
181 495 |
16 245 |
62 995 |
181 495 |
|
Average tax rate (T1/Inc) |
11% |
20% |
28% |
11% |
20% |
28% |
11% |
20% |
28% |
|
|
|||||||||
|
Reduction in taxable income (contribution)* |
0 |
0 |
0 |
27 840 |
27 840 |
27 840 |
0 |
0 |
0 |
|
Reduction in taxable income (expenses) |
8 750 |
16 000 |
12 000 |
8 750 |
16 000 |
12 000 |
2 030 |
9 280 |
5 280 |
|
Reduction in tax payable** |
0 |
0 |
0 |
0 |
0 |
0 |
8 640 |
8 640 |
8 640 |
|
|
|||||||||
|
Net tax payable (T2) |
14 670 |
58 195 |
176 695 |
9 659 |
49 843 |
165 559 |
7 240 |
51 571 |
170 743 |
|
Effective average tax rate (T2/Inc) |
10% |
18% |
28% |
6% |
16% |
26% |
6% |
16% |
27% |
* Benefit of current system where deductions of R720 and R440 is applied to taxable income
** Benefit of new system where tax credits of R216 and R144 is applied to final tax amount payable by taxpayer
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
Get the latest issue of FAnews