Income Tax and Medical Tax Credits for the Individual

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.

The new dispensation consists of a two-tier credit system:

  1. A medical scheme fees tax credit (MTC) that applies in respect of qualifying contributions to a medical scheme.
  2. An additional medical expenses tax credit (AMTC) that applies in respect of other qualifying medical expenses.

The application of the AMTC system falls into three 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.

In order to qualify for the AMTC in the “65 years and older” category, the taxpayer must be 65 years or older on the last day of the relevant year of assessment or, had he or she lived, would have been 65 years or older on the last day of the relevant year of assessment

The two types of credits are dealt with separately in this guide, namely:

(i) Part A – the MTC, dealing with contributions to a medical scheme; and
(ii) Part B – the AMTC (which replaced the deduction of the medical allowance) dealing with other qualifying medical expenses, including out-of-pocket expenses.

This article will deal with Part A – the MTC requirements only. A second article will deal with Part B – the AMTC.

Part A – Section 6A rebate (medical scheme fees tax credit)

Taxpayers qualify to claim an MTC in respect of contributions paid by them (or deemed to have been paid by them) to a registered medical scheme.
Only medical scheme contributions paid by a taxpayer for him- or herself, and his or her dependant(s) may be considered in the determination of an MTC.

Only qualifying contributions that were paid to a registered medical scheme (and that can be proven to have been paid by a taxpayer either directly or indirectly), will be taken into account in determining the MTC that the taxpayer will be entitled to claim. The taxpayer claiming the contributions must be able to prove that he or she actually paid the contributions.

More than one taxpayer could pay a portion of the contributions due to a registered medical scheme. The MTC in such cases must be apportioned between each taxpayer that makes payment.

Qualifying contributions paid by a person other than the taxpayer will not be taken into account when the MTC is determined, except for:

• qualifying contributions 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 his or her death; and
• qualifying contributions 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.

Medical scheme fees tax credit

The MTC is set at a fixed amount per month. Since the MTC is a “rebate” and not a “deduction”, it is not refundable and cannot exceed the amount of normal tax payable.

An employer that effects payment of the medical scheme fees is obliged to take into account the MTC when calculating the employees’ tax to be deducted or withheld from employees’ remuneration. This is usually carried out using the various payroll systems. The MTC may be taken into account at the option of the employer where the employer does not effect payment of the medical scheme fees, and if proof of payment of those fees has been furnished to the employer. Taxpayers who have not had their MTC taken into account may claim the applicable rebate by submitting an annual ITR12 income tax return to take advantage of the credit.

A South African employer that makes contributions to a foreign medical fund in respect of an employee has the obligation to determine whether the legislation that governs such foreign fund is similar to the provisions of the MS Act and whether such contributions will therefore qualify for an MTC.

Apportionment of the medical scheme fees tax credit where contributions are paid by more than one taxpayer

There may be situations in which contributions are paid to a registered medical scheme by more than one taxpayer – for example, siblings who share the costs for a parent who is a “dependant” as defined. In such cases, the MTC must be apportioned between each person paying the contributions. The following formula can be used to determine the MTC that may be claimed by each taxpayer:

Contributions payable by the person
———————————– x Total MTC
Total contributions payable

In July 2022, SARS will assess a significant number of taxpayers automatically. These will be original assessments based on an estimate, and will be based on third-party information readily available to SARS. The information may be received from multiple institutions such as banks, fund administrators, insurers, MEDICAL AID SCHEMES and employers. An individual who receives an estimated assessment from SARS has 40 business days from the date of the assessment to submit his or her original return if he or she does not agree with the assessment raised by SARS.

An individual who is auto-assessed, will be notified by short message system (SMS) – so there will be no need for the individual to call SARS or to visit a branch. The SMS will direct the individual to eFiling or the SARS MobiApp to view the Notice of Assessment if he or she is an eFiler. If the individual is not registered for eFiling, an SMS will be sent communicating the summary of assessment results and, in addition, the comprehensive Notice of Assessment will be sent via mail.

On receipt of the pre-populated income tax return, the individual must verify the pre-populated information on the income tax return against any IRP5/IT3(a) certificate(s) and any other relevant tax certificates, such as those issued by a MEDICAL SCHEME or retirement annuity fund;

A medical scheme fees tax credit and an additional medical expenses tax credit may also be available to reduce an individual’s tax liability. These are rebates for contributions made to a registered medical scheme and out-of-pocket medical expenses paid by individuals.

A second article will deal with Part B, the AMTC – additional medical expenses tax credit.

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