Your medical scheme tax credits and the budget 2013

As a medical scheme member and tax payer in South Africa, you may be wondering how your cashflow will be affected by changes to the national budget this year. As Clayton Samsodien, Managing Director of Genesis Healthcare Consultants, explains, the income

In his 2013/14 Budget Speech, Minister of Finance, Pravin Gordhan announced an increase to the “MSFTC”, increasing the tax credit you qualify for - up to R242 for each taxpayer and for each first dependant, with each additional dependent qualifying for a tax credit of up to R162.

The conversion from a deduction system to a credit system was aimed at providing a fixed rate of tax credit. Therefore, since the medical aid contribution cannot be deducted from income, it means that taxable income will now be higher and, as a consequence the PAYE, will be higher.

The tax credits can be processed through the payroll during the year or claimed at the end of the tax year. It is important to note that medical scheme tax credits are a fixed amount that will offset against tax payable.

Taxpayers 65 years or older may deduct all qualifying medical expenses and medical aid contributions without any limitation (the tax credit regime will only apply to taxpayers 65 years or older as of 1 March 2014).

Case Study 1

(Under 65 years old, medical aid deduction via payroll, taxpayer plus 2 dependants, taxable income = R7 000 per month)

! According to 2013/14 tax tables
*According to 2012/2013 tax tables
Reduction due to personal income tax relief

The above example illustrates that the medical scheme tax credit is equivalent to the PAYE since the tax credit can only be offset against tax payable. Another observation is the decrease in tax liability, in the 2013/14 tax tables, for individuals younger than 65, that results in a decrease in PAYE as illustrated here, resulting in a lower medical tax credit. Therefore, according to the 2013/2014 tax tables, individuals earning above R83 256 per annum can claim the full allowable medical schemes tax credit for the taxpayer only.

Taxpayers are able to claim, at the end of the tax year, an additional deduction for medical scheme contributions that exceed the tax credits including out-of-pocket medical expenses not covered by the scheme.

Therefore, to work out the amount that can be allowed as an additional deduction or claimed back, look at the amount by which the medical aid contributions in the tax year exceeds 4 times the tax credits, add to this the out-of-pocket medical expenses. Only the amount by which this sum exceeds 7.5% of the taxpayer’s taxable income, for the tax year, can be deducted for tax purposes. Now subtract 7.5% of the taxpayer’s taxable income for the tax year from this total. You are left with the amount that can be deducted or claimed back from the taxman. (Note, the 7.5% of taxable income is not applied to the disabled persons.)

Case Study 2

Illustration of additional amount that can be deducted at the end to the tax year emphasising the importance of keeping accurate records and receipts of out-of-pocket expenses.