Tag Archive: Medical Tax Credit


Finance Minister Pravin Gordhan delivered his Budget Speech on 26 February, favouring consistency and steadiness over change and fireworks ahead of the national election on 7 May.

Some tax relief for tax payers in the 2014/15 Budget Speech – 40% of the tax relief was allocated to those who earn up to R250,000 per annum, meaning individuals earning more than R250,000 per annum will receive a little less of the allocated tax relief pool.

Though some commentators had speculated that high earners would need to pay higher income tax, the Minister left income tax rates untouched, says Madelein van der Watt, Development Manager at Sage Pastel Payroll & HR. The lowest tax bracket remains at a tax rate of 18% (annual taxable income up to R174,550) and the highest tax bracket remains taxable at 40% (annual taxable income of more than R673,100).

Tax credits for medical scheme contributions

Effective from 1 March 2012, the medical aid capping system was replaced with a tax credit – bringing in equality for all taxpayers under the age of 65 and improved benefits for lower earners.

In the new tax year, commencing 1 March 2014, monthly tax credits for medical scheme contributions (reduction of tax payable) have been marginally increased from:

  • R242 to R257 for the main member and the first dependent on a medical scheme
  • R162 to R172 for each additional beneficiary on the medical scheme

The medical aid tax credit system allows a reduction on income tax and does not reduce taxable earnings as the medical aid deduction system allowed in the past.

“The credit system is a more fair approach to providing tax relief as each individual contributing towards a medical aid fund will receive equal relief as it is not based on annual earnings. Whether an individual earns R250,000 per annum or R2,500,000 per annum, the income tax liability will be reduced by R257 for each of these individuals with at least a single beneficiary on the medical aid fund.”

From the 2014/15 tax year, medical aid contributions by people older than 65 will also be subject to the medical aid tax credit system. Up until now, those contributions were fully tax deductible. Effective from 1 March 2014, their contributions will also be subject to the medical aid tax credit system.

Is it a fringe benefit?

The company contribution towards an employee’s medical aid yields a taxable fringe benefit.

Generally, any payment made by an employer on an employee’s behalf, must be included in an individual’s taxable remuneration, before calculating the final PAYE deduction. Only pension and provident fund contributions are still exempt from the rule until 1 March 2015.

Regardless of an employee’s age or employment contract conditions, the medical aid contributed by an employer, whether in cash or as a package component directly to the fund, must be treated as a taxable fringe benefit.

The contribution paid by the employer will be subject to employee’s tax and contrary to popular belief, there is no way to structure a salary package to bypass the fringe benefit.

During the 2012/13 year of assessment, 76% of all fringe benefits reported on tax certificates were medical aid contributions made by employers on behalf of their employees.

Medical Aid Contributions must be reported on the employee’s tax certificate

As part of the Employer Filing season, each company is responsible to issue their respective employees with a tax certificate.

Medical Aid Contributions, both the employee and employer contributions must reflect on the employees tax certificate (IRP5/IT3A). If you’re making use of an automated payroll system, the codes are already loaded for you. In addition, a company is making use of an automated payroll system, they can import a payroll file with all the filing requirements directly into the e@syFile™ Employer system and the payroll EMP501 Reconciliation Report to complete the PAYE, SDL and UIF reconciliations. Van der Watt points out that this saves businesses considerable time and cost compared to manual calculation and capturing.

If you’re making use of a manual payroll system or payroll spreadsheets, please make use of the following codes:

  • Source code 4005 for employee and employer contributions
  • Source code 3810 for the taxable fringe benefit equivalent of the employer’s contribution
  • Source code 4116 for tax credits allowed

How can an automated payroll system make your business life easier?

To calculate the correct employee’s tax effect of a medical aid contribution, an employer must take the following into account:

  1. What is the total contribution that must be processed every month?
  2. How much of the contribution must be deducted from the employee’s gross income and how much is payable by the employer?
  3. Is the employer’s payment made as a cash contribution to the employee or paid directly to the medical aid?
  4. Remember to include any employer payment as a taxable fringe benefit when calculating the PAYE deduction for the month.
  5. How many dependents belong to the employee’s medical aid?
  6. Remember to constantly keep track of new dependents added or dependents removed from the medical aid policy.
  7. Remember to check for any contribution increases or change in medical aid cover that might affect the contribution value processed on the payroll.
  8. Don’t forget to calculate the medical aid tax credit after you have determined PAYE based on taxable earnings. The tax credit is based on the number of dependents and must reduce the PAYE value before you calculate the net pay.
  9. Every six months, you need to submit a PAYE reconciliation to SARS detailing the contributions, fringe benefits and tax credits related to medical aid contributions.

Payroll software will take care of the calculations and reporting of medical aid contributions and the PAYE effect thereof.

It is also important to keep in mind that effective 1 March 2014, employees aged 65 and older are also included in the medical aid tax credit system and their contributions may no longer be allowed as tax deductions. If you still make use of spreadsheet or manual methods of calculating PAYE, it is important to adjust your calculations to not only cater for new medical aid tax credits for the 2014/15 tax year, but also to keep in mind that you need to adjust the calculation for your employees aged 65 and older.

“Our software is designed to make your business life so much easier, so that you can focus on running your business. Let automated payroll solutions take care of the six major payroll acts and the ever-changing legislative plethora that governs payroll,” says Sumay Dippenaar, Marketing Manager at Sage Pastel Payroll & HR.

“There is no reason for businesses to rely on manual payroll spreadsheets since we offer automated solutions that are easy-to-use, smart and affordable, whether you deploy them on the desktop or in the cloud. Our subscription-based payroll solution allows you to pay low monthly fees with no upfront capital outlay, keeping your cash flow in mind.” With an online payroll solution, you only pay per payslip that you process. This pay-as-you-go model is cost-effective at R18 excluding VAT per payslip.

Example

Mr Jim Hardens is 67 years old, he earns a basic salary of R15,000 per month and the company contributes the full medical aid contribution of R1,000 on his behalf. He is the only member on his medical aid.

Below, please see how the calculation differs for tax year 2013/14 and 2014/15. Seeing that Jim is over 65 years, he also needs to be taxed on the medical tax credit system, effective 1 March 2014. Jim will enjoy a tax saving of R143.04 in the new tax year.

TAX YEAR 2014/2015
SALARY R 15 000
ADD MEDICAL AID FRINGE BENEFIT R 15 000 + R1 000 = R16 000
ANNUALISES TAXABLE INCOME R 16 000 * 12  = R192 000
TAX AS PER SARS TABLES R 192 000 – R 174 550 = R 17 450 * 25% + R 31 419 = R35 781.50
LESS PRIMARY REBATE R 35 781.50 – R 12 726 = R 23 055.50
LESS SECONDARY REBATE (FOR EMPLOYEES OVER 65 YRS) R 23 055.50 – R 7 110 = R 15 945.55
DEANNUALISE R 15 945.55/12 = R 1 328.79
LESS MEDICAL AID TAX CREDITS R 1 328.79 – R257
PAYE FOR THE MONTH R 1 071.79
TAX YEAR 2013/2014
SALARY R 15 000
ADD MEDICAL AID FRINGE BENEFIT R 15 000 + R 1 000 = R 16 000
LESS TOTAL MEDICAL CONTRIBUTION R 16 000 – R 1 000 = R 15 000
ANNUALISES TAXABLE INCOME R 15 000 * 12 =  R 180 000
TAX AS PER SARS TABLES R 180 000 – R 165 600 = R 14 400* 25% + R 29 808 = R 33 408
LESS PRIMARY REBATE R 33 408 – R 12 080 = R 21 328
LESS SECONDARY REBATE (FOR EMPLOYEES OVER 65 YRS) R 21 328 – R6 750 = R 14 578
DEANNUALISE R 14 578 / 12
PAYE FOR THE MONTH R 1 214.83
TOTAL SAVING R 143.04

 

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By Rob Cooper, Softline VIP payroll and legislative expert

Proposed changes to the Income Tax Act were issued for public comment in July 2012, some of which have a direct impact on employers and computerised payroll systems.

Rob Cooper

Rob Cooper

One change in particular constitutes a major shift in approach from the legislators, but first, a brief overview of the other changes.

Medical Tax Credit Principle to be Extended

From March 2012, we saw the introduction of medical tax credits (tax rebates) for employees under 65 years of age who contribute to a medical scheme.  Changes were also made to the income tax relief granted on assessment to individuals for their out-of-pocket medical expenses subject to certain conditions.

The draft changes now extend the medical tax credit principle for contributions to include those employees who are 65 years of age or older.  The values proposed for their tax credits are the same as those currently used for under 65 year old employees, and are based on the number of dependents.

Then the deduction system of income tax relief for out-of-pocket medical expenses has been replaced by a medical tax credit system, with varying degrees of relief for over and under 65 year old employees, and for those who are disabled or with a disabled spouse or child dependent.

What is of concern is that the tax relief granted for medical contributions and out-of-pocket medical expenses has been whittled away by the changes made last year and the proposed changes in the draft legislation, particular for those taxpayers who earn above the 30% marginal tax rate.

Individuals over the age of 65 and those who are pensioners in particular have been hit hard in recent years by dividend tax changes and interest tax relief amongst other measures.  A further reduction in the assistance from the state for medical contributions and medical expenses is going to hurt these individuals.

The same can be said for families with a disabled person – surely these individuals deserve more support, not less?

Employment-related Insurance Policies

The taxation of employer-owned insurance policies that impact on employees has been the subject of complex changes to the law over the past two tax years.  Just when it seemed that the dust had settled, the draft legislation proposes some more changes that are too complex and too confusing to discuss here.

The words “unintended consequences” again come to mind …

Learnerships

Some fine tuning has been made to the provisions which allow employers a deduction from income of R30 000 at the start and the end of a learnership.  These changes address the delays in registration of the learnership with a SETA which can reduce the value of the incentive, as well as the disallowance of the incentive will be limited to learnerships that the employee failed while working for the current employer.

Accrual of Variable Remuneration

One of the pillars that our tax law stands upon is the concept of ‘accrual’.

Amounts are generally interpreted to have accrued when there is an unconditional entitlement to that amount.  This causes problems for payroll systems that have to withhold employees’ tax on amounts that accrued in one tax year, but were only quantified and processed in the next tax year.  Adjustments to monthly payments to SARS, tax certificates and reconciliations are the inevitable result of adjusting amounts back into a tax year that has already closed.

In one of the most significant changes to employees’ tax requirements in decades, the accrual principle is proposed to be relaxed for variable remuneration items such as commissions, travel payments, overtime and bonuses.

At this early stage, much thought still has to be put into the practical implications of this change, but there is no doubt that it will significantly simply payroll administration over the tax year end for employers and for SARS and is to be welcomed.

Closing thoughts

Lastly, there are some items that have been proposed in the Budget by the Minister of Finance for a number of years and which, while still bubbling away, have not yet made their way into draft legislation.

These include the standardisation of taxation rules for retirement funds, and some changes to the Unemployment Insurance Legislation.

Unfortunately, the political football that the Youth Subsidy has become has been booted into touch, to be replaced by a Job Seeker grant system which has not even been discussed or quantified.