Medical aid rebate has side effects

FOR the 2013-14 tax year, the rebate is increased by R12 a month to R242 for the member plus one dependant, and by R8 a month to R162 for subsequent dependants.

The full effect of the conversion of tax deductions for medical aid expenses to the rebate system has received little analysis. The new rebate system will only be fully in place with effect from March 1 next year.

The philosophy behind medical aid rebates has merit. Why should a wealthy taxpayer receive a 40% subsidy on medical expenses, whereas the lower level worker only gets 18%? Surely all of us are equal when ill?

The rebate system is designed to ensure that taxpayers under 65 receive a tax rebate of 25% of medical expenses. That sounds generous if the average rate of tax for South Africa is 18%.

Over 65s get a rebate based on 33% of medical expenses. That is even more generous, because few geriatric taxpayers have an average rate exceeding 33.3%. Many will score over the current system.

There’s a catch. The old limitation of medical expenditure deductions to expenses exceeding 7.5% of taxable income did not die with the old system.

The calculation of the medical rebate for taxpayers under 65 is sufficiently complicated to ensure the demise of many tax 101 students. The resultant effect is more important. Taxpayers under 65 will have to suffer a heart attack or similar discomfort before the medical expenses not covered will be sufficient to obtain a medical tax rebate exceeding the standard monthly medical aid rebate.

So, most taxpayers under 65 receive a tax subsidy of R242 per month and that’s it. This is less than 10% of the cost of an executive medical aid.

Recently, I have been hugely impressed by some of the new office block concepts. Energy efficiency, staff transport, gymnasium – and smokers condemned to basements. But I have yet to see much beyond a medical-aid box.

Surely, with a bit of thought, the modern office block could retain a company doctor for staff and their dependants? Then they could reduce the extent of medical aid cover to major disasters only.

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

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