Changes to tax treatment of medical expenses from 1 March – worked example

Medical tax credits on the spotlight
Medical tax credits on the spotlight

At present taxpayers aged under 65 years are on a hybrid system with regard to the income tax treatment of their medical expenses. While contributions to medical aids are subject to credit relief, medical expenses in excess of 7.5 % of taxable income are claimed as a deduction. On the other hand, taxpayers aged 65 years or older are on a deduction-only system.

From 1 March 2014, all taxpayers regardless of age will be on a credit-only system.

As is currently the case, contributions to medical aids or medical expenses by the taxpayer’s employer are a taxable fringe benefit in the hands of the employee but the amount of the fringe benefit is treated as if it was a contribution or expense paid by the employee for purposes of the conversion to credits referred to below.

The main points regarding the workings of the credit-only scheme are as follows. For further clarity we have also provided a worked example.

For taxpayers aged under 65 years without a disabled dependant: Contribution to a medical aid (without regard to the quantum of the contribution) will qualify the taxpayer to receive a credit of fixed monthly amount, based on the number of the taxpayer’s dependants on the medical aid scheme.

However, to the extent that the sum of:

  • qualifying medical expenses and
  • medical aid contributions in excess of four times the fixed credit above

exceeds 7.5 % of the taxpayer’s taxable income, an additional credit arises. This additional credit is calculated by multiplying the excess amount by 25%.

For taxpayers aged 65 years and older or for taxpayers with a disabled dependant:

  • Contribution to a medical aid (without regard to the quantum of the contribution) will qualify the taxpayer to receive a credit of fixed amount, based on the number of the taxpayer’s dependants on the medical aid scheme.
  • However, medical aid contributions in excess of three times the fixed credit amount above will be converted to additional credits at the rate of 33.3%
  • Qualifying medical expenses (with no threshold requirement) will also be converted to credits at the rate of 33.3%.

For PAYE purposes the employer may only take the fixed monthly credit amount into account and not the additional credits. Where the employer does not effect payment of the medical aid contributions it may only take the fixed monthly credit amount into account if proof of payment of such contributions has been furnished.

An example to illustrate how this will work in the calculation of tax payable by employees is provided below. We have used the 2014 medical scheme fees tax credit amounts as well as the 2014 tax tables.

The Taxpayers is a natural person with on dependant
Year of assessment commencing 1 March 2014
Taxable Income 450 000
Medical Aid contributions 25 000
Medical Expenses 40 000
Under 65 with
Disabled Over 65 but
Tax Calculation Under 65 Dependant under 75
Taxable Income 450 000 450 000 450 000
Tax per tax tables 115066 115066 115066
Medical Scheme credit
(R242 + R242) * 12 months -5808 -5808 -5808
Excess Medical fees Credit
R 25, 000 -(3 * R508) = R7 576
Converted to tax credit at 33.3%
Other qualifying medical expenditure
R40,000 converted to tax credits at 33.3% N/a -13 320 -13 320
Excess medical fees and qulifying medical expenditure
Excess medical scheme fees : R25, 000 – (4 * 5,808) = 1,768
Excess medical scheme fees : R25, 000 – (4 * 5,808) = 1,768
Other medical expenditure = 40,000
=41,768
less 7.5% of R450,000(taxable income) = 33,750
=8,018
Converted to tax credits at 25% -2005 N/a N/a
Less primary rabate -12080 -12080 -12080
Less secondary rabate (over 65’s) N/a N/a -6750
Tax payable 95173 81335 74585