Since the introduction of the Medical Tax Credits (MTC) in March 2012, there continues to be a number of queries coming in from clients which, for the benefit of all our clients, are dealt with below:
- The MTC can only be deducted from the employees’ tax due if:
- A contribution to a medical scheme is paid (i.e. a legitimate scheme!). This is irrespective of whether the contribution is made by the employer, the employee, or its split between them. If the employee makes the full contribution then suitable proof of membership / contribution should be provided by the employee to the employer.
- The Employee must be under the age of 65 (on the last day of the tax year).
- Where the Employee is employed for only part of a month, the full MTC for the month can be deducted from his/her tax due. This could create a situation where, should the employee work for another employer for the remainder of that same month, a double MTC deduction could occur. This will be solved if the employer makes use of the “annualisation” principle in the payroll. In any event, the total MTC deducted for the year will again be validated by SARS at assessment time and any MTC over the allowed limit for the year will be recovered from the employee / taxpayer by SARS.
- The MTC is “non-refundable”, which means that an employee’s tax can never be in a negative situation (i.e. where the MTC applicable is more than the tax due in a period). This also then means that the shortfall in MTC credit (i.e. the unapplied portion of the MTC) can in effect be carried over to the next month within the same tax year. Here again this is where the concept of “annualisation” comes in. However – a MTC unapplied portion cannot be carried over from one tax year to the next.
- Some effects of the new “MTC” vs. the previous “reduction of taxable earnings” methods:
- The new system favours lower income earners whereas the old system favoured high income earners.
- Under the old system, to a person who paid tax at the marginal rate of 40%, a cap amount deduction would have been worth 40% of the deduction, whereas for a person who paid tax at 18%, the deduction would have only been worth 18%.
- In the new system, everyone gets the same benefit as it is an amount deducted directly from tax due as opposed to a reduction in taxable earnings.
The value of the MTC that was actually applied against the Employee’s tax due is stored in a new code, namely 4116. Clients don’t have to do anything here as our systems automatically handle this in the background. Clients only need to use this if a manual tax certificate is being created (i.e. outside the system).
- The MTC must not be applied to tax due where a directive has been issued which results in the tax on retirement lump sums or severance benefits that is calculated in accordance with any of the two special lump sum tax tables. The two being:
- Retirements funds i.r.o. lump sums paid by the fund (these are generally not issued to “normal” employees)
- Directives issued to employers in respect of a severance lump sum paid by the employer
- For employees who are over the age of 65 and still working (i.e. still employed) – they still get the full medical contribution as well as any medical expenses incurred as a deduction. So the full medical aid contribution paid (or deemed to have been paid) by the employee must still be deducted from the employee’s taxable income (i.e. as was done previously). In essence this compensates the Employee for not getting the MTC.
- Disabled employees or employees who have disabled dependants are entitled to an additional MTC (up to 4 times the amount that exceeds their medical aid contribution) as well as all expenses related to the disability – but not on a monthly basis – only on assessment. This is due to older payroll systems not being able to manage this process monthly. So in most cases the employee incurs the cost monthly but is only able to claim these costs (or appropriate portion of these costs) at assessment time.