Budget 2007 - On the medical side..

Tax changes assist medical scheme members

The budget speech delivered on Wednesday by the Minister of Finance, Trevor Manuel, will have a positive effect on members of medical schemes, especially those on the lower cost options.

The change from 2006 is that the first two members of a scheme may now deduct R530 monthly from tax in terms of medical scheme expenditure, up from R500 last year. For any subsequent members, a deduction of R320 each can be made, as opposed to R300 last year.

This represents an increase of 6%, which does not quite keep up with the pace of medical inflation, "but any increases in deductions are always welcome", says Dr Lenny Modisane, principal officer of Resolution Health Medical Scheme.

Resolution Health Medical Scheme has more than 46,000 principal members and over 100,000 beneficiaries throughout South Africa.

"With its dedication to providing the best possible cover at the most competitive rates, many members of Resolution Health Medical Scheme will be glad to know that their tax benefits have hardly been affected by rising inflation," says Dr. Lenny Modisane, Principal Officer of Resolution Health.

"All members on the Fundamental and Hospital Plans, Resolution Health's two most affordable options, will still receive a 100% tax deduction, as the plans fall comfortably within the tax guidelines," Dr. Modisane added.

"Even on our Progressive Plan, single parents and families of four and larger will be able to deduct their full contribution from tax."

Update of Medical Aid Contribution Tax-Free Amounts

The much anticipated 2007 budget speech delivered by the Minister of Finance, Trevor Manuel, has come and gone. This speech saw South Africans witness the Minister of Finance delivering on his promise to update annually the monthly medical aid contributions tax-free amounts as promised by him when he introduced the new tax treatment of medical aid contributions. The Minister has increased the monthly tax-free amounts from R500 to R530 per month for the taxpayer and one dependant and from R300 to R320 for every additional dependant. This increase is aimed at aligning the monthly tax-free amounts with the annual increase in medical aid contributions.

As stated by the Minister in his budget speech, the intention of the legislation is to provide incentives for people to join low-cost medical schemes with the hope that the market will respond to the demand that would be created. The legislation is also aimed at ensuring that low income earners have medical aid cover.

In light of the above, Dumisa Sihawu, a senior tax consultant at Deloitte embarked on an exercise to ascertain whether there are in fact these so called low-cost medical aid schemes and whether the tax benefit would encourage individuals to join such schemes. We limited our exercise to three of South Africa's medical aid funds where we compared whether or not each funds low-cost option would be accommodated by the tax relief.

The exercise confirmed that the medical aid funds selected all have a low-cost medical aid option available.

In order to perform our comparisons of the tax benefits available for the low-cost medical aid options, the following assumptions were made:

*  The employee earns between R1 000 and R3 000 per month

* There are 3 members on the medical aid i.e. the member, the spouse and one child

The results of our exercise were as follows:

Fund A offers the individual an option with a monthly contribution, for the member and two dependants, amounting to R910 (R340 for the member, R340 for the spouse and R230 for the child). If the employer makes the full contribution, the allowed tax-free capped amounts would be R1 380 (R530 for the member, R530 for the first dependant, and R320 for the additional dependant). Therefore no fringe benefit has arisen.

Fund B offers the individual an option with a monthly contribution, for the member and two dependants, amounting to R815 (R362 for the member, R362 for the spouse and R91 for the child). If the employer makes the full contribution, the allowed tax-free capped amounts would be R1 380. Therefore no fringe benefit has arisen.

Fund C offers the individual an option with a monthly contribution, for the member and two dependants, amounting to R898 (R416 for the member, R336 for the spouse and R146 for the child). If the employer makes the full contribution, the allowed tax-free capped amounts would be R1 380. Therefore no fringe benefit has arisen.

In conclusion, it appears that the new legislation is having its intended results. This means that low income employees can afford medical aid cover and where the employer makes the full contribution for such employees, there will generally be no fringe benefit implications for the employee. This can be viewed as an incentive for the employer and the employee as it means that the low income earning staff has access to medical cover that is tax free in the hands of the employee.