Edwin Naidu: The Sunday Independent & The National Treasury, 19 February 2006

WHILE many rejoiced over the personal income tax relief announced by Trevor Manuel, the finance minister, landmines lie in wait for many taxpayers from March 1: they will have to pay more for medical aid contributions.

Monetary caps for tax-free medical scheme contributions, announced last year, have been introduced. "Some will pay more, some less, with the object being to reorganise the tax subsidy so that people who earn less but join medical aids receive a bigger subsidy," said Pat Sidley, the spokesperson for the Council for Medical Schemes.

As part of a new method of calculating the tax on medical aid contributions, the tax-free fringe benefit for medical aid contributions will be limited to a fixed amount of R500 each for the taxpayer and first dependent and R300 for each additional dependant. Medical aid contributions and expenses by the taxpayer can be deducted if they exceed 7,5 percent (previously 5 percent of income). Taxpayers older than 65 will still be able to deduct all medical expenses and contributions.

Sidley said the initiative aimed to widen access to medical aid schemes among low earners, resulting in middle to high-income earners on comprehensive packages in their medical schemes getting less in rebates. "If they are earning well, the plan is to get them to contribute to healthcare of others. I'm not certain if it will open the floodgates and let millions of people join," she said.

Cecil Morden, the head of the tax policy unit at the national treasury, said the tax on medical aid contributions, first unveiled in a discussion document last year, would widen access.

"This is an attempt to equalise benefits by providing better rebates to low earners."

Heidi Kruger, the spokesperson for the Board of Healthcare Funders, said there was concern that medical aid members might downscale in favour of cheaper options because of the tax.

"Higher income earners have in the past benefited from bigger subsidies while the new system will provide relief for low-income groups. I'm not sure if this will expand membership," she said.

Kruger said medical aid contributions should be kept low to ensure that low-income groups could afford them, adding that the government's efforts must be seen in a context in which medical aid numbers had remained consistent for eight years at around 7 million members.

"The population is ageing, making premiums more expensive," she said.

How tax on contributions affects you

Example 1

Mary's employer pays two thirds of her total medical scheme contributions. She is married and has no children. The total medical scheme contribution for her and her husband is R1 800 a month. Her employer contributes R1 200 and she pays R600 from her after-tax salary. She does not pay tax on the employer's contribution, but from March 1 this year she will have to pay tax on R200 of it.

Example 2

Dumisa is self-employed, married and has four children. He is a member of a medical scheme and his family of six is covered by this scheme. His total medical scheme contribution is R2 300 a month or R27 600 a year (R800 a month for him, R600 for his wife and R300 each for his first three children; the fourth child is covered but no contribution is payable).

He can deduct medical expenses (including contributions to a medical scheme) of more than 5 percent of his taxable income. Assuming his income is R200 000 a year, he can deduct R17 600 (being R27 600 less 5 percent of R200 000) from this income. In terms of the new legislation Dumisa will be able to deduct R2 200 (R500 x 2 + R300 x 4) from his monthly income, or R26 400 a year, for income tax purposes.

Example 3

Tasneem's employer is offering to contribute two thirds of her medical scheme contribution. She is the only employed person in her family of four and the total monthly medical scheme contribution to cover her family will amount to R1 500. Her portion of this contribution will be R500 and she will benefit from a monthly tax-free employer contribution of R1 000. Although the cost seems low,

Tasneem is reluctant to take part in this scheme, as she will have to pay R500 a month from her net salary of R4 500.

Example 4

Vusi is single and his employer pays two thirds of his medical scheme contributions. His total monthly medical scheme contribution is R750 of which his employer pays R500. Vusi's contribution to his medical scheme is therefore R250. In addition he incurred other out-of-pocket medical expenses (due to an unforeseen injury) of R2 000. These expenses were not covered by the medical scheme. His medical expenses for the year were therefore R5 000.

In terms of the new legislation the employer contribution to his medical scheme coverage will remain tax-free. He will also be allowed to deduct medical expenses exceeding 7,5 percent of his income. His salary is R50 000 a year and he is allowed to deduct all medical expenses above R3 750. His actual medical expenses are R5 000 and he can therefore claim R1 250 (R5 000 less R3 750) as a deduction for this particular tax year.

Example 5