Do you know how the new changes to the tax treatment of medical aid contributions affects you?

Can you believe that SARS is introducing changes to the tax treatment of medical aid contributions again?

Well, we can't. Just last year, we were updating you about the changes that SARS made in 2012. And now there are new changes and you MUST comply with them.

So what are these new changes?

SARS has made the following changes to the tax treatment of medical aid contributions

Fin24 explains that at the moment taxpayers aged under 65 years are on a hybrid system with regard to the income tax treatment of their medical expenses. While contributions to medical aids are subject to credit relief, medical expenses in excess of 7.5% of taxable income are claimed as a deduction.

Meanwhile, taxpayers aged 65 years or older are on a deduction-only system. (If you're not sure what this means, we explain it extensively in this article).

But with the new rules, which come into effect from 1 March 2014, all taxpayers will be on a credit-only system. Age will no longer be a factor.

What does this mean for your personal medical aid contributions?

David Warneke of BDO SA says currently contributions to medical aids or medical expenses by the taxpayer's employer are a taxable fringe benefit in the hands of the employee, Fin24 reports.

Warneke explains that if you're a taxpayer under the age of 65 and you don't have a disabled dependent, contributions towards medical aid (without regard to the quantum of the contribution) will qualify you to receive a credit of a fixed monthly amount.

This will be based on the number of dependents on the medical aid scheme. However, 'to the extent that the sum of qualifying medical expenses and medical aid contributions in excess of four times the fixed credit above exceeds 7.5% of the taxpayer's taxable income, an additional credit arises,' says Warneke.

This additional credit will be calculated by multiplying the excess amount by 25%.

What if you're aged 65 years and older and you have a disabled dependent on your medical aid

In this case, contributions to a medical aid (without regard to the quantum of the contribution) will qualify you to receive a credit of a fixed amount, based on the number of dependents on the medical aid scheme.

However, medical aid contributions in excess of three times the fixed credit amount above will be converted to additional credits at the rate of 33.3%, says Warneke.

Qualifying medical expenses (with no threshold requirement) will also be converted to credits at the rate of 33.3%.

What do the new changes to the tax treatment of medical aid contributions mean to you as an employer?

According to Warneke, for Pay As You Earn (Paye) purposes, you'll only be allowed to take the fixed monthly credit amount into account and not the additional credits.

In the case, where you don't effect payment of the medical aid contributions, you may only take the fixed monthly credit amount into account if proof of payment of such contributions has been furnished.

We'll keep you updated on how you need to get in line with these new changes and how to help your employees to make deductions when it comes to medical aid contributions.

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