Manager of Personal Trust’s Tax Department, Ronald Smith clarifies the new medical aid tax credit system.
In the 2012 Budget speech, it was announced that the medical deduction system would be replaced by a medical aid credit system for all taxpayers under the age of 65. This tax year, which commenced on 1 March 2014, saw the medical aid tax credit system extended to people older than 65. The medical aid tax credit system allows a reduction on income tax and does not reduce taxable earnings as the deduction system allowed in the past. In addition, claims in respect of additional qualifying out of pocket costs have also been converted to the credit basis for all individuals.
The monthly tax credits for medical scheme contributions are:
- R257 for the main member and the first dependant on a medical scheme
- R172 for each additional beneficiary on the medical scheme.
A predetermined formula has been provided to calculate what credits will be received, but what impact does this have on the final tax liability of individuals and is it beneficial or not?
The predetermined formula states that the following will be allowed as a credit against a tax liability:
- A credit equal to 33.3% (25% in the case of individuals under the age of 65) of qualifying medical costs incurred and paid PLUS
- A credit equal to 33.3% (25% in the case of individuals under the age of 65) of the amount by which medical scheme contributions exceed three times (four times in the case of individuals under the age of 65) the monthly tax credits
- In addition, for individuals under the age of 65, the qualifying costs must exceed 7.5% of taxable income.
The tax effect is best illustrated by way of an example. For our purposes, assume that:
- The individual is 75 years of age
- Taxable income is R500,000 per annum before accounting for any medical deduction
- The number of family members is four
- Contributions to a medical aid are R30,000
- The qualifying medical costs amount to R15,000.
The medical tax credit is calculated as follows:
To calculate the primary tax credit:
R257 per month x 2 x 12 (R6,168) for the main member and the first dependant + R172 x 2 x12(R4,128) for the two additional beneficiaries = R10,296.
Secondary tax credit = Medical aid contribution less 3 x monthly tax credit plus qualifying medical costs x 33.3%:
R30,000 – (R10,296 x 3) = NIL + (R15,000 x 33.3%) = R4,995.
Therefore, total tax credit = R10,296 + R4,995 = R15,291.
The tax calculation will be as follows:
It appears that the previous method was more beneficial but ultimately the benefit, or lack thereof, is determined by income earned and medical costs incurred. Besides the increased tax liability for some, the downside in my opinion is that an assessed loss, which in several instances could have been created by the medical cost deduction, will no longer be obtainable.
24 June 2014
Response to comment below:
The example provided was for illustrative purposes to demonstrate the difference between the old (deduction basis) and the new (credit basis) system. However, we have done the calculation based on the information you provided which is detailed below. I trust you will find this useful.
Personal Trust International