Good muti for many taxpayers

ALL taxpayers will be converted to the medical rebate system from March 1 2014. How many will be winners and how many losers?

You have to actually pay tax before there can be any tax benefit on medical expenses.

The latest South African Revenue Service statistics reflect that there are 4.3-million taxpayers who actually pay tax, out of 13-million registered taxpayers. The remaining 8.7-million are below the tax threshold and receive no tax benefit on their medical expenses.

To score from the rebate system, these taxpayers have to have a marginal tax rate above 25%, or R25,8751 a year.

Thus, roughly 3.7-million of the 4.3-million taxpayers will potentially score a higher tax rebate than they did under the old medical expense tax deduction system.

But to score a medical rebate above the standard one, the taxpayer has to both submit a tax return and, if under 65, have medical expenses exceeding 7.5% of taxable income.

About 600,000 taxpayers have taxable income exceeding R258,751 a year. They will lose out because the tax deduction applied against a tax rate above 30% would have been worth more than the new tax rebate.

Taxpayers over 65 represent a mere 8% of the tax base. Most have a lower income than the general body of taxpayers because they have lost their employment income.

Most taxpayers over 65 will benefit from the new rebate system because the qualifying medical expenses are not subject to the 7.5% of taxable income limitation applied to the under-65 taxpayer and the medical rebate is calculated applying a 33.3% tax rate. But again, it is necessary for taxpayers over 65 to submit a tax return to obtain the rebate; many do not.

For a taxpayer over 65 to lose out because of the new rebate system, taxable income must exceed R358,111. I cannot get to the exact number, but it would be fewer than 40,000 taxpayers.

Some say that the new medical rebate system is meant to fund the introduction of national health insurance. Bollocks. Limiting the value of medical deductions for 600,000 South Africans while increasing deductions for 3.7-million is hardly a solution to fund the nearly 42-million who do not have a medical aid.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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