The tax treatment of medical expenses changes dramatically from 1 March 2006.
Andre Jacobs, Regional Manager Healthcare for Aon says Aon fully
supports the intention to equalise the tax benefit in favour of middle and lower income earners with respect to contributions paid towards a medical scheme.
He says the two main changes are related to:
How the employers contribution towards medical expenses will be taxed as a fringe benefit in the hands of the employee. (Par 12A of the 7th Schedule)
How much of the contribution the employee will be allowed to deduct from his/her taxable income. (Section 18)
In the old dispensation, the 2/3 rule resulted in an inequitable
distribution of the tax subsidy. The case study below clearly explains the inequity of the old tax treatment between members on more expensive options and self-employed people.
---------
Case study:
If we assume three taxpayers are all married with one child. Mr. Naidoo belongs to a medical scheme with a contribution of R 3 000 per month, subsidised in full by his employer. Mr. Nkomo belongs to a medical scheme with a contribution of R1 800 per month and subsidised in full by his employer. Mrs. Nel, who has her own company, belongs to a medical scheme with a contribution of R1 800.
The result would have been that Mr. Naidoo would receive a tax subsidy of R2 000 per month (two-thirds of R 3 000), Mr. Nkomo a tax subsidy of R1 200 per month (two-thirds of R1 800) and Mrs. Nel would receive no tax subsidy but she can claim back her contributions for the year (R1 800 x 12 = R 21 600) when she submits her annual tax return. Mrs. Nel would have been able
to claim back a portion of her contributions towards her medical in terms of section 18 of the Income Tax Act. If her taxable income were R 200 000 per annum she would have been able to claim back R 11 600 per annum (R 21 600 R 10 000). If Mr. Nkomo also has a taxable income of R 200 000 he would have received a tax benefit of R 14 400 (R1 200 X 12).
-------------
According to Jacobs the new tax dispensation will provide a fixed rand amount to all taxpayers, irrespective of their salary, employment conditions, or cost of medical scheme. In our case study, all three taxpayers will receive a tax subsidy of R1 300 (R500 for the principal member, R500 for the next beneficiary and R300 for each beneficiary thereafter). This is clearly more equitable, but could lead to confusion when preparing and calculating the changes for payroll. Employers will need
to create an accurate database of employees and dependants in order to accurately process the monthly calculations with respect to fringe benefit tax.
To assist employers, Aon has developed an impact analysis to explain and assess the impact of the proposed tax changes, on all employees, in an employer group.
In this regard the definition of dependants in the Income Tax Act has been amended to include the definition as defined in the Medical Schemes Act. Employer participation policies need to be scrutinised for compliance, and in doing so the subsidy policy of employers needs to be reviewed to ensure that no additional risks are incurred. Employers need to be mindful of not creating a situation where a change in participation policy creates an
open-ended liability, he cautions.
Aon also supports the change that from 1 March 2006, employer provided medical treatment may not attract tax, subject to specific criteria being met. He says this could pave the way for employers to provide medical cover to their full workforce.
The changes to the Income Tax Act relating to medical scheme contributions will necessitate a revision of the participation and subsidy policies at employer levels. In this the broker should guide and protect their clients interests (employers and employees alike). The administrative process relating to these tax changes is enormousand brokers should assist both the employer and employees in understanding the implications and to ensure that
the maximum tax rebate is claimed.
At the heart of these changes is the intention that every person who belongs to a private medical scheme will receive an equitable guaranteed tax benefit. This is in support of governments commitment to extend healthcare to all in the formal employment sector, concludes Jacobs.
Get the latest issue of FAnews