A tax rebate will be granted, instead of a capped deduction of medical aid contributions that is deducted from taxable income.
The reason for this is stated to be that the medical cap amount is more favourable to high earners than low earners. To a person paying tax at the marginal rate of 40% a cap amount deduction will be worth 40% of the deduction, whereas for a person paying tax at 18% the deduction will be worth only 18% of the deduction.
This is regarded as unfair, in that the allowance should result in the same tax saving for rich as for poor people, which is achieved by the tax credit, which is a deduction from tax (ie, a tax rebate).
The tax credit
The tax credit is applicable to all taxpayers other than those aged 65 or more. That is, it does not apply to a person who is entitled to the old age rebate. The reason for this is the same as the cap amount not being applicable to such a person, who is allowed to deduct medical aid contributions from taxable income.
The tax credit is applicable where a medical aid contribution is paid by the taxpayer (other than those aged 65 or more). The amount of the credit is – R216 for the contributor; R216 for the first dependant; and R144 for each further dependant for each month for which those fees are paid.
This is the same basis as used for the medical cap amount, so the logic of the calculation of the amount of the benefit will not change. All that will change will be that the result will be deducted from tax payable instead of from taxable income.
Any medical aid contribution paid by the employer is a taxable fringe benefit, and is deemed to have been paid by the employee, the same as it is at present, except that now this applies to employees aged 65 and more as well.
Tax calculation for PAYE purposes
The only change required to be made in a company’s payroll programs is in the tax calculation. Instead of deducting the cap amount from income, the tax credit will be deducted from tax. The annual tax credit will be the tax credit annualised by whatever method of annualising is used for the employee.
Medical aid contributions
The full medical aid contributions paid by or deemed to be paid an employee aged 65 or over on the last day of the tax year must still be deducted from that employee’s taxable income, the same as it is at present. This compensates the employee for not being given a tax credit.
As stated earlier, medical aid contributions paid by the employer for a person aged 65 or more are now treated as a taxable fringe benefit, the same as for employees aged less than 65. These contributions are deemed to have been paid by the employee.
No medical aid contributions paid by employees aged less than 65 may be deducted from taxable income for PAYE purposes. Previously, they were allowed to deduct contributions up to the cap amount, but that has now been replaced by the tax credit.
*Ron Warren is a tax expert and executive chairman of payroll software company NuQ
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