Double dip tax claim loophole to stop

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Shohana Mohan | Employees Tax Committee Member | SAICAmail me |


The Draft Taxation Laws Amendment Bill has proposed an amendment in order to address the tax leakage through a double dip in the claiming of the medical scheme fees tax credit.

From 2011, taxpayers claim a medical scheme fees tax credit in respect of the medical scheme contributions they make for themselves, their spouse and dependants.

For the 2018/2019 tax year, section 6A (2)(b) of the Income Tax Act No. 58 of 1962 (the Income Tax Act) provides that if you are a taxpayer younger than 65 and not disabled and have no disable dependants, you may claim a medical scheme credit as follows:

  • R310 if the contributions to the medical scheme is for you as the taxpayer only;
  • R620 if the contributions are in respect of the you as the taxpayer and one dependent;
  • R209 in the case of each additional dependant

If you as a taxpayer made a contribution for yourself to a medical scheme and shared the medical scheme contributions for your mother on a proportional basis with your sister for example, you would be entitled to claim a medical scheme fees tax credit in the amount of R620 per month.

On the other hand, your sister would also be in a position to claim an amount of R310 in respect of her proportionate contribution toward her contribution to her mother’s medical scheme. This results in a medical scheme fees tax credit of an amount of R620 being claimed by both you and your sister in respect of the contributions you make toward your mother’s medical scheme. This results in tax leakage.

To address the tax leakage which was addressed as a concern for government in the Budget Speech delivered in February 2018, the Draft Taxation Laws Amendment Bill, 2018 issued on 16 July 2018 proposes an amendment to section 6A (2)(b) by introducing the proposed amendments discussed below.

Proposed legislation amendments

In terms of section 6A 2(b)the amount of the medical scheme fees tax credit must be:

  • R310, in respect of benefits to the taxpayer, or if the taxpayer is not a member of a medical scheme in respect of benefits to a dependent of the taxpayer who is a member of a medical scheme;
  • R620, in respect of benefits to the taxpayer and one dependant; or
  • R620, in respect of benefits to two dependants; and
  • R209, in respect of benefits to each additional dependant.

The proposed wording of the legislation extends the ambit of the application of the claim for a medical fees tax credit to situations where the taxpayer may not be a member of a medical scheme but may contribute on behalf of his dependant(s).

In this regard, it is proposed that the definition of ‘dependant’ in section 6A be aligned with the definition in section 6B which will provide for situations where the person who makes the contributions to the medical scheme and the person on behalf of whom the contributions are made, are not on the same medical scheme as envisaged in terms of the Medical Schemes Act. Accordingly, reference to dependant as defined in the Medical Schemes Act will be removed and referenced to the definition of dependant as detailed for the purpose of section 6B of the Income Tax Act.

To address the apportionment of the medical scheme fees tax credits between or among the various taxpayers who are contributors to the medical scheme, it is proposed that section (3A) be included.

This section provides:

‘Where more than one person pays any fees in respect of benefits to a person or dependent, the amount allowed to be deducted in respect of the medical scheme fees tax credit under subsection (2)(b) must be an amount that bears to the total amount allowable in respect of that person or dependant under that subsection the same ratio as the amount of the fees paid by that person bears to the total amount of fees payable.’

Practical application

The proposed legislation will result in a reduced credit for most taxpayers who contribute on a proportional basis to a medical scheme on behalf of a dependant.

The following example is used to illustrate the position should the proposed legislation become effective from 1 March 2018:

Scenario
  • Taxpayer A and Taxpayer B jointly contribute equally to their mother’s medical scheme contributions.
  • They each contribute an amount of R1,500 per month.
  • The total monthly contribution is therefore R3,000.
  • Taxpayer A is a member of a medical scheme and has 3 dependants which include a spouse and two children.
  • Taxpayer B is a member of a medical scheme and does not have any dependants other than the contributions made in respect of her mother’s contribution to a medical scheme.

Result

Applying the proposed legislation to the set of facts will result in the following implications per taxpayer:

Taxpayer A will only be allowed a claim of R104.50 per month in respect of the tax year ending 28 February 2019 instead of the full R209 per month.

Taxpayer B on the other hand will only be allowed a credit of R155 per month as opposed to the full R310 per month. This results in a reduced loss to the fiscus of 50 per cent (i.e. R259.50) of what should have been claimed absent the proposed amendment.  Assuming the contributions to the medical scheme were made for a full period of 12 months, the estimated reduced loss to the fiscus is an amount of R3,114.

Practical aspects for consideration

If the legislation is promulgated with effect from 1 March 2018, the personal income tax return form for the tax year ending 28 February 2019, will require additional information to be furnished to determine the quantum of the claim.

Taxpayers should therefore ensure that they have the relevant information on hand with regard to the calculation of their share of the contributions they carry. This may also include obtaining relevant supporting documentation where the proportionate share of the contribution is paid to a third party such as a sibling who then on-pays the full contribution to the medical scheme as opposed to paying the contribution directly to the medical scheme.


 

 

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