A proposed system of tax credits for medical scheme contributions could make scheme membership more affordable for people who earn less than R235 000 a year, a discussion document released by the National Treasury this week shows.
The proposed system, which is to be implemented next year, will benefit these members at the expense of higher-income earners. It will also reduce the government’s tax take.
In addition, the discussion document suggests a consultation pro-cess to explore the possibility that the tax credit system be extended to tax deductions for out-of-pocket medical expenses. The National Treasury says such a move will adversely affect only higher-earning pensioners and higher-income families with members who are disabled.
The proposals to change the tax deduction (an amount set off against your taxable income) for your medical scheme contributions to a tax credit (an amount set off against your tax) from March next year are contained in the draft Taxation Laws Amendment Bill, which was released earlier this month.
The discussion document contains details of the effects of these proposals, as well as proposals to change the deductions allowed for out-of-pocket medical expenses to tax credits from 2015.
In addition to discussing how the tax credit system will redistribute the tax relief for medical scheme contributors, the document shows that the system will cost the government almost a billion rand more than its current system.
The National Treasury estimates that in the 2008/9 tax year the government forfeited R15.7 billion in tax by allowing you to deduct your medical scheme contributions and medical expenses from your taxable income. If the proposed tax credit system had been in place, it would have spent R16.6 billion.
The rand amounts that you can deduct from your taxable income for medical scheme contributions benefit you by saving your paying tax at your highest marginal tax rate. The consequence of this system is that higher-income earners benefit more than lower-income earners.
The document says the current deductions for medical scheme contributions are unfair, because they depend on income, and the tax system should not contribute more to your medical expenditure on the basis of higher income.
The proposed tax credits will be set at the rand amount you would enjoy as a tax benefit from the current deductions if you were on a marginal tax rate of 30 percent. The discussion document says this will provide tax relief that is equitable across income groups.
The marginal tax rate of 30 percent applies to earnings of between R235 000 and R325 000 a year.
Anyone who earns less than R235 000 a year should benefit from the tax credit system, whereas those who earn more than R325 000 are likely to see an increase in their tax liability from March next year.
In its discussion document, the treasury says estimates indicate that it is providing tax benefits equivalent to an average of 22 percent of the current capped amounts, and setting the tax credit at the 30-percent tax rate should benefit most taxpayers.
Currently, taxpayers aged 65 and over, as well as those who have a disabled family member, can deduct all their medical scheme contributions and all qualifying unrecovered medical expenses (those not paid by a scheme) from their taxable incomes.
Both these groups of taxpayers should still be able to deduct all their expenses and most of their contributions from March next year, despite the proposed introduction of an additional tax credit for these taxpayers, Ismail Momoniat, the director of tax policy at the treasury, says.
The treasury will in any case finalise its proposals only after public consultation, he says.
The discussion document says that the shift to tax credits will facilitate the transition of medical schemes into a national health insurance (NHI) framework, because the contribution from the tax system will be equitable, limited and likely to be in line with, or less than, the insurance costs per person under NHI.
The document says tax relief for medical scheme contributions over and above the NHI costs and out-of-pocket medical expenses is likely to fall away under NHI, although there may be a phasing-out period.
The discussion document says that it is not administratively possible to pay the tax credit to scheme members who are below the tax threshold or who qualify for credits that exceed their tax liability. However, it says, the credits could be extended to these people once a proposed risk equalisation fund is in place as part of the NHI reforms.
The deadlines for public comment are July 22 for the draft legislation proposals for 2012 and October 31 for the discussion document proposals. The documents are available at www.treasury.gov.za
CURRENT MEDICAL DEDUCTION SYSTEM
This tax year (2011/12) you are entitled to deduct from your taxable income R720 a month each for yourself, as the main medical scheme member, and for the first dependant you register on your scheme. You are entitled to deduct R440 a month for each additional dependant.
If your employer pays all or part of your medical scheme contributions, this deduction will offset that subsidy, which is included in your income as a taxable fringe benefit.
If you do not receive a subsidy or you receive a subsidy that is less than these rand amounts, the rand amount, or the balance of it, will reduce your taxable income.
If your contributions exceed these amounts, you can claim the excess only if you are over the age of 65 or if you or a family member is disabled.
The tax benefit you receive as a result of the deduction for scheme contributions depends on your marginal tax rate. If your marginal rate is 18 percent (for an annual income of less than R150 000), your tax benefit is 18 percent of the rand amount allowed as a deduction. This amounts to a potential tax benefit of R5 011 for a taxpayer with a family of four registered on a medical scheme.
If your marginal rate is 40 percent (for an annual income of R580 000 or more), your benefit is 40 percent of the rand amounts allowed as a deduction. This amounts to a potential tax benefit of R11 136 for a taxpayer with a family of four on a scheme.
In addition, if you are under 65 years of age, you can deduct qualifying unrecovered medical expenses for yourself and your dependants where these exceed 7.5 percent of your taxable income.
If you are over the age of 65 or if a member of your family is disabled, in addition to being able to deduct all of your medical scheme contributions, you can deduct all of your unrecovered qualifying medical expenses, as well as those of members of your immediate family.
TAX CREDIT SYSTEM FROM NEXT YEAR
The Taxation Laws Amendment Bill proposes that, as of March 1 next year, you will be allowed to deduct a rand amount from your tax for medical scheme contributions. This rand amount will increase each year, but the tax rate at which the credit will be set will be about 30 percent.
In the explanatory memorandum to the Taxation Laws Amendment Bill, the National Treasury says that, if the tax credit were set for the 2011/12 tax year, it would be R216 a month for the member and the first dependant (30 percent of the R720-a-month deduction for this tax year) and R144 for each dependant thereafter (32.7 percent of the R440-a-month deduction for this tax year).
In addition, the explanatory memorandum says, people over the age of 65 and those with a disabled family member will be entitled to a supplementary tax credit.
The discussion document released this week reveals that the supplementary tax credit will be the same as the tax credit, or R216 a month at 2011/12 tax rates. The supplementary tax credit for contributions will be allowed only for contributions paid in respect of people over the age of 65 and for people with disabilities.
However, if your contributions exceed four times the tax credit, you will be able to claim the excess as a deduction from your taxable income at your marginal rate.
For example, if you are over 65 and pay R2 000 a month in contributions, you will be entitled to a monthly tax credit of R432 (R216 x 2) plus a monthly deduction from taxable income of R1 136 (R2 000 – [R216 x 4]).
The treasury says this system should have little impact on people over 65 who pay scheme contributions for spouses or dependants under the age of 65, and for families with a disabled member.
It will, however, benefit you if you are under the age of 65 and pay medical scheme contributions for a person over the age of 65, because you will enjoy the supplementary tax credit for that person.
The deductions for unrecovered qualifying medical expenses will be allowed to continue in their existing form for the next few years.
HOW IT WILL WORK IN FUTURE
In future, tax deductions for qualifying unrecovered medical expenses may also be changed to tax credits, with the National Treasury proposing that these credits be set at a tax rate of 25 percent.
The treasury says in its discussion document that it would prefer to convert the tax deductions to tax credits, which are more equitable and easier to administer.
The existing deductions for out-of-pocket expenses can also benefit higher-income earners more than lower-income earners, although this is somewhat offset by the fact that the threshold at which you can claim (7.5 percent of taxable income) rises with your income.
The treasury has put forward some proposals, but emphasises that these are only for discussion, and it will hold extensive consultations, including a workshop with over-65s and the disabled, before finalising proposals for draft legislation and further comment. The proposals are:
* For taxpayers under the age of 65: a tax credit for unrecouped medical expenses in excess of 10 percent of taxable income at a tax rate of 25 percent.
* For taxpayers over the age of 65 and for taxpayers with a disabled family member:
* A tax credit for unrecouped expenses in excess of five percent of taxable income at a tax rate of 25 percent; or
* A tax credit for all unrecouped expenses at a tax rate of 25 percent.
If these proposals are implemented, taxpayers who are over the age of 65 and who have a disabled family member may find that their tax liability will increase, but this will depend on their income level and hence their tax rate.
The treasury says if a tax rate of 30 percent is used, the effect on higher-income earners will be less pronounced, while those in lower-income brackets will benefit more.
The treasury says it wants to continue to give tax relief to vulnerable people over the age of 65 and those with disabilities, because they face higher medical expenses, and pensioners typically have limited incomes. In addition, employer sponsorship of retirees’ medical scheme contributions is falling.
However, it says, high-income individuals over the age of 65 or with a disabled family member are also benefiting from this tax relief.
The treasury is also concerned about the government’s ability to sustain this unlimited tax relief.
Next year, after it has considered public comment and once greater details about the implementation of national health insurance have become available, the treasury says it will make a formal proposal on the medical deductions for out-of-pocket expenses, which can be phased in from 2015 onwards.