1. Tax treatment of medical scheme contributions and other medical expenses
March 2006

2. The hardest thing in the world to understand is the income tax.
Albert Einstein

3. Background
National Treasury and SARS in consultation with DOH has reviewed tax treatment
Effective 1 March 2006
Affects tax treatment of medical scheme contributions and medical expenses
Will impact most members on medical schemes

4. Pre - 1 March 2006
Employed
Monthly member contribution to medical scheme not tax deductible
Employer contribution not deemed to be fringe benefit up to limit (66% of total contribution – 2/3rds rule)
Member may claim medical expenses on annual assessment to extent that it exceeds 5% of taxable income

5. Pre - 1 March 2006 (cont.)
Pensioners (older than 65) & Disabled members excluded from 5% rule
Self employed members could only claim a contribution deduction on annual assessment based on 5% rule

6. Pre - 1 March (Example) Current dispensation – Example Single Member
Total Contribution: R1000
Marginal Tax Rate: 35%
Employer contribution: R666
Member Contribution: R333

7. Pre - 1 March (Example) Current dispensation – Example 1 cont.
Member is taxed on 1/3rd of total contribution = R333
Therefore employees tax = R333 x 35% = R116
Only R333 p.m. can be included in annual assessment as medical expenses

8. Post 1 March 2006 New dispensation
All medical aid contributions are deemed to be employee contributions (Change)
Members are taxed on amounts that exceed the monthly monetary cap (Change)
Members may claim medical expenses (including taxed contributions) on annual assessment to extent that it exceeds 7.5% of taxable income (Change)

9. Post 1 March 2006
Pensioners (older than 65) & disabled members excluded from 7.5% rule (not affected)
Monthly monetary cap is as follows:
Member = R500
1 Additional dependant = R500
All further dependants = R300

10. New dispensation – cont.
New dispensation – Example
Single Member
Total Contribution: R1000
Marginal Tax Rate: 35%
Tax Free contribution: R500
Fringe benefit: R500
Monthly tax liability: R500 x 35% = R135
(Currently R116)

11. New dispensation – cont. Breakeven point
Monthly Monetary Cap
Neutral Contribution Level M
R500
R750
M+1
R1 000
R1 501
M+2
R1 300
R1 950
M+3
R1 600
R2 400
M+4
R1 900
R2 850

12. Post 1 March 2006 Breakeven point
If the contribution is higher than the Neutral level the member will pay more tax and vice versa
The impact will depend on the level of the contribution and the member’s marginal tax rate

13. Post - 1 March % Rule
The full medical aid contribution will be deemed to be an employee contribution
The portion that the member did not get tax relief on will qualify for a deduction on assessment

14. Post - 1 March 2006 7.5% Rule 7.5% rule – Example 1 Single Member
Total Contribution: R1000
Annual Taxable Income: R60 000
Tax Free contribution: R500
Fringe benefit (taxable): R500 x 12 = R6 000
Annual threshold: % x R = R4500
Claimable deduction: R6 000 – R4500 = R1500
(Based on actual tax figures this member will pay R90 per annum more tax)

15. Post - 1 March 2006 7.5% Rule 7.5% rule – Example 2 Single Member
Total Contribution: R1000
Annual Taxable Income: R
Monthly Monetary Cap: R500
Fringe benefit (taxable): R500 x 12 = R6 000
Annual threshold: % x R = R7500
Claimable deduction: R6 000 – R7500 = R0
(Based on actual tax figures this member will pay R360 per annum more tax)

16. Post - 1 March 2006 Salary Additional annual tax liability R60 000 R90

17. SARS - View Encourages broader medical scheme coverage
Provides complete tax relief on affordable medical aid options for low and middle income families
Removes tax induced reduction in marginal price of more expensive options

18. SARS – View (cont.)
Removes tax induced reduction in marginal price of more expensive options
Interferes with market discipline on prices and cost
Pre – 1 March a marginal price increase of R1 resulted in a cost increase of R1.13
(Tax liability = R0.13)
Post – 1 March a marginal price increase of R1 will result in a cost increase of R1.40
(Tax liability = R0.40)

19. Post 1 March 2006 Definition of Dependant
Income Tax Act was amended to change definition in line with Medical Schemes Act
“dependant” means –
(a) The spouse or partner, dependant children or other members of the member’s immediate family in respect of whom the member is liable for family care and support; or
(b) Any other person who, under the rules of a medial scheme, is recognised as a dependant of a member;

20. Post 1 March 2006 Definition of Dependant (cont.)
Contributions i.r.o. (a) and (b) will qualify for preferential tax treatment
Medical expenses i.r.o. only (a) will qualify for preferential tax treatment
Implication for administrators (Tax certificates)
Reflecting of dependants and period on scheme
Medical expenses i.r.o (b) would have to be excluded

21. Looking to the future
Monthly Monetary Cap will be reviewed annually (undertaking by National Treasury)
2007 – Consideration will be given to apply higher cap for adults and lower cap for children