Income Tax and Medical Tax Credits for the Individual

This article continues the discussion of Medical Tax Credits; please read the first article before continuing with this one.

Sources:

Guide on Income Tax and the Individual (2021/22) - SARS
Guide on the Determination of Medical Tax Credit - SARS
Medical Schemes Act 131 of 1998
Income Tax Act 58 of 1962
Tax Administration Act 28 of 2011

In 2012, tax relief for medical expenditure began a phased-in conversion from a deduction system to a tax credit system. The reason for the change was to eliminate vertical inequity relating to medical contributions: those at higher marginal tax rates received a larger reduction of tax payable than those on lower marginal rates, in respect of the same amount of medical expenditure. The purpose of the change was to spread tax relief more equally across income groups, thus bringing about horizontal equity – those who pay equal values for medical expenditure receive absolute equal tax relief.

A tax credit system differs from a deduction system in that, instead of permitting a deduction of the medical allowance against a taxpayer’s income, the relief is granted as a reduction in tax payable. It therefore operates as a tax rebate.


Part B – Section 6B rebate (additional medical expenses tax credit)

The AMTC is a rebate against taxes payable and is, as a result, limited to the tax payable before the offset of employees’ tax and provisional tax. The AMTC can accordingly not create a refund, nor can any excess be carried forward to the next year of assessment.

Taxpayers could qualify to claim an AMTC, however, the extent to which these qualifying medical expenses can be taken into account to calculate the AMTC is different depending on the category within which a taxpayer falls.

A taxpayer who is 65 years of age or older may qualify for a portion of the AMTC to be taken into account through the monthly employees’ tax system.

The AMTC can be claimed by a taxpayer in respect of that taxpayer and any of his or her “dependants” as defined.


Qualifying medical expenses

Qualifying medical expenses fall into four categories, each of which is discussed below:

(a) Qualifying medical expenses incurred inside the Republic
(b) Qualifying medical expenses incurred outside the Republic
(c) Qualifying medical expenses for a disability
(d) Qualifying medical expenses for a physical impairment


(a)	Qualifying medical expenses incurred inside the Republic

Expenses paid by a taxpayer during the year of assessment to any duly registered:

(i) medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor, or orthopaedist for professional services rendered or medicines supplied to the person or any dependant of the person;
(ii) nursing home or hospital or any duly registered or enrolled nurse, midwife or nursing assistant (or to any nursing agency in respect of services of such nurse, midwife or nursing assistant) in respect of the illness or confinement of the person or any dependant of the person; or
(iii) pharmacist for medicines supplied on the prescription of any person mentioned in subparagraph (i) above, for the person or any dependant of the person,will be taken into account in determining the AMTC, provided these expenses have been paid for the taxpayer or any dependant of the taxpayer.

In order for the expenses to qualify for the AMTC, the expenses must not have been recoverable by the taxpayer from any person, for example, from the taxpayer’s medical scheme or an insurer under a medical gap cover insurance plan.


(b)	Qualifying medical expenses incurred outside the Republic

Expenses for medical services and supplies that have been incurred outside South Africa may be taken into account in the determination of the AMTC during a year of assessment if they:

• have been paid during that year of assessment, and
• are substantially similar to qualifying medical services rendered or medicines supplied in South Africa.


(c)	Qualifying medical expenses for a disability

Expenditure prescribed by the Commissioner and which is necessarily incurred and paid for by the taxpayer in consequence of a disability, qualifies for an AMTC under section 6B, but is subject to certain limitations, depending on the category within which a taxpayer falls. These expenses are set out in the List of Qualifying Physical Impairment or Disability Expenditure (the List), revised on 29 October 2021 and published with effect from 1 March 2020. The List is prescriptive and sets out the category and description of each expense that could be regarded as a qualifying medical expense in consequence of a disability.

The expense must be in consequence of a disability suffered by the taxpayer or any dependant of the taxpayer. The expense will only qualify if it was necessarily incurred and paid by the taxpayer.

The terms “necessarily incurred” and “in consequence of” are not defined in the Act; therefore, they retain their ordinary meaning. “Necessary” is defined as “required to be done…needed”, while “consequence” is defined as “a result or effect; as a result”. In their context within the Act, these phrases mean that there must be a direct link between the expenditure incurred and the disability, and the item or service acquired must be necessary to alleviate or support such disability. This means that a prescribed expense does not automatically qualify for an AMTC by mere reason of its listing.

For example, if a person with a disability, who has no visual impairment, purchases a handheld Global Positioning System (GPS), the cost of the hand-held GPS will not qualify for an AMTC even though the expense has been prescribed (listed) by the Commissioner. This is because the hand-held GPS is not directly connected to this person’s disability and is hence neither necessarily incurred, nor incurred in consequence of the disability. In the case of a person who is, for example, visually impaired, the cost of the hand-held GPS may qualify for a deduction.


Confirmation of disability (ITR-DD form)

A person who wishes to claim an AMTC for disability expenses must first complete a Confirmation of Diagnosis of Disability form (ITR-DD) to allow a registered medical practitioner to diagnose and confirm, amongst others, the extent of the disability before the taxpayer submits an income tax return. The ITR-DD must not be submitted with the annual income tax return but must be retained for compliance purposes in the event of a SARS audit.

 
Qualifying medical expenses for a physical impairment

Taxpayers are also permitted to take into account qualifying medical expenses for a physical impairment in calculating the AMTC.

The term “physical impairment” is not defined in the Act. However, in the context of section 6B(1), it is regarded as a disability that is less restraining than a “disability” as defined.

This means the restriction or limitation on the person’s ability to function or perform daily activities after maximum correction is less than a “moderate to severe limitation. Maximum correction in this context means appropriate therapy, medication and use of devices. 

Physical impairments will, for example, include:

• bad eyesight; 
• hearing problems; 
• paralysis of a portion of the body; and 
• brain dysfunctions such as dyslexia, hyperactivity or lack of concentration. 

Diabetes and asthma are recognised as medical conditions and not as physical impairments.


Timing of claim for qualifying medical expenses

Qualifying medical expenses can only be claimed in the year of assessment during which they are actually paid. Expenses can be incurred during a year of assessment but may not necessarily be paid in that same year of assessment. This will, for example, be the case where the obligation to pay expenses has been incurred towards the end of a year of assessment but has only been paid in the subsequent year of assessment, or where medical expenses are incurred on account and the instalments are only paid in the subsequent year of assessment.

Similarly, a qualifying medical expense that relates to both a current year of assessment and the subsequent year of assessment, may be incurred and also paid in the first year of assessment. In such a case, the full amount incurred and paid in the first year may be claimed in that first year.



Contributions and qualifying medical expenses deemed to be paid by the taxpayer

Contributions to a medical scheme and qualifying medical expenses paid by a person other than the taxpayer29 will not be taken into account when the AMTC is determined, except for:

• qualifying contributions and medical expenses paid by the estate of a deceased taxpayer for the period up to the date of the taxpayer’s death. These costs are deemed to have been paid by the taxpayer on the day before the taxpayer’s date of death; and
• qualifying contributions and medical expenses paid by an employer of a taxpayer, to the extent that the amount has been included in the income of the taxpayer as a taxable benefit.


Amount of additional medical expenses tax credit to be deducted from tax due

The calculation of the AMTC to which a person is entitled, is determined based on the following categories:
(a) Taxpayers aged 65 years and older
(b) Taxpayer, his or her spouse or his or her child is a person with a disability
(c) All other taxpayers


Taxpayers aged 65 years and older

Persons aged 65 years and older could qualify for the AMTC, which is calculated as follows:

Qualifying medical expenditure paid during the year of assessment, amounting to

• 33,3% of the fees paid to a medical scheme or qualifying foreign fund as exceeds three times the amount of the MTC33 (Section 6A(2)(b) of the Act) to which that person is entitled; plus
• 33,3% of qualifying medical expenses paid (out-of-pocket expenses)


Employees’ tax

A taxpayer who is 65 years of age or older may qualify to have a portion of the AMTC taken into account when calculating the employees’ tax to be deducted from his or her remuneration. 

The taxpayer must be a member of a registered medical scheme and, if the employer:

(i) pays the medical scheme contributions directly, the employer is required to take the qualifying portion of the AMTC into account; or
(ii) does not pay the medical scheme contributions directly, the employer may take the qualifying portion of the AMTC into account, if the taxpayer has provided proof of payment of the contributions.

Out-of-pocket expenses may not be taken into account for employees’ tax purposes. Taxpayers who have not had their AMTC taken into account for employees’ tax purposes may submit a tax return to SARS to take advantage of the AMTC.


Taxpayer, his or her spouse or his or her child is a person with a disability The calculation of the AMTC for persons with a disability is only available where the taxpayer, his or her spouse or his or her child is a person with a disability.


All other taxpayers

In addition to the MTC, all other taxpayers – that is, taxpayers who have not qualified under the categories “Taxpayers aged 65 years and older” or “Taxpayer, his or her spouse or his or her child is a person with a disability” will be entitled to an AMTC that is limited to 25% of the amount by which the sum of the amounts listed below exceeds 7,5% of the taxable income (excluding retirement fund lump sum benefits, retirement fund lump sum withdrawal benefits, and severance benefits) before taking into account this AMTC:

(i) All contributions made by the taxpayer to a registered medical scheme (in respect of the taxpayer, his or her spouse and any dependant) that exceeds four times the MTC; and
(ii) Actual qualifying medical expenses (including expenses for a physical impairment or for a disability that is mild and not moderate to severe) paid by the taxpayer and not recoverable from the medical scheme in respect of the taxpayer and any dependant.

In (ii) above, the following expenses must be taken into account in the determination of the AMTC:

• All qualifying out-of-pocket medical expenses relating to services and prescribed supplies; and
• Expenses relating to a physical impairment (if applicable)



How to claim the medical scheme fees tax credit and additional medical expenses tax credit

Persons registered for income tax

Included in the documentation that must be retained for audit purposes when an MTC or AMTC is claimed for a year of assessment is the following:

• Proof of contributions paid to a registered medical scheme or to any other funds registered under similar provisions in the laws of any other country. Contributions paid to a registered medical scheme will be reflected on the medical aid certificate.
• A statement from the medical scheme indicating the total amount of claims submitted to the fund that were not refunded to the taxpayer or paid by the scheme to the service provider. The medical statements, which are generally released by each medical scheme in February or March each year, usually reflect the total amount for the year of assessment. Taxpayers could be asked to prove that they have paid the amounts disclosed on the medical aid certificates.
• A completed list of amounts not submitted to or recoverable from the taxpayer’s medical scheme, together with proof of such amounts incurred and paid.
• In cases where receipts have been made out in the name of a dependant, or contributions or fees in respect of a dependant have been made to a different medical aid to the one to which the taxpayer belongs, SARS will accept a sworn affidavit in which the taxpayer indicates that the contributions, fees or qualifying expenses claimed for the dependant, have actually been paid by the taxpayer (either directly or indirectly).
• A letter from the taxpayer’s medical scheme, stating that the benefits allocated to certain medical procedures are exhausted, when applicable.
• A duly completed and signed Confirmation of Disability (ITR-DD) form, if applicable.


The documentation, as well as receipts, must not be submitted with the annual income tax return, but must be stored and made available on SARS’s request, in the event that a taxpayer is required to substantiate the medical claims. A taxpayer is required to keep records such as receipts, paid cheques, bank statements, deposit slips and invoices for five years from the date of submission of the return.

In cases where objections and appeals have been lodged against assessments, the taxpayer must keep all records and data relating to the assessments under objection or appeal until such time that the objection or appeal has been finalised, even if the timeframe for finalisation exceeds five years.


Persons not registered for income tax

Taxpayers who are not required to submit tax returns are generally either employees, or are taxpayers whose income is below the tax threshold. These taxpayers may have an MTC or AMTC that was not taken into account during the year of assessment. The mere submission of a tax return will have no effect on the taxpayer’s tax liability if the employer has already taken the MTC or AMTC into account. The MTC or AMTC will also not create a refund if the taxpayer has no liability for normal tax.


How to object to the disallowance of a medical scheme fees tax credit or additional medical expenses tax credit

A taxpayer who claimed an MTC or AMTC and who is aggrieved with the assessment issued may object to it. The objection must be in the prescribed form “Notice of Objection” (NOO) which can be obtained via eFiling or at a SARS branch office. The NOO, which states the grounds on which the objection is lodged, must reach the relevant SARS branch office where the taxpayer is on register for income tax within 30 business days after the date of the assessment, or “due date”.

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