Employees will end up with less in their pockets if Katz's sixth interim report recommendations on benefit funds are adopted.
What are benefit funds?
The Income Tax Act defines benefit funds as any Friendly Society, medical scheme, or fund (except a pension, provident or retirement annuity fund) which the Commissioner for Inland Revenue is satisfied was established for the purposes of providing sickness, accident or unemployment benefits for its members and/or for providing benefits for the dependants or nominees of deceased members.
The Friendly Societies Act governs friendly societies. They are generally set up to provide for the items described under the "other fund" category, but cater for, among other things, education and housing benefits.
So what does Katz recommend?
Firstly, medical funds: if you're an employee you'll lose out, if you are self employed, you'll score. Katz recommends that the contributions only be deductible in the employer's hands on a rand for rand basis. If a fund is non-contributory by the employee, no portion of the contribution will be tax deductible. This will result in employers going back to the 50/50 contribution method to ensure that at least the employer's contribution is deductible.
The self employed who, if under 65, were only able to deduct medical costs to the extent that they exceeded five percent of taxable income should, the report recommends, be allowed to deduct 50 percent of their medical aid contributions.
Although a dramatic change for employees who currently belong to non-contributory schemes, the recommendation has to be commended in that it brings in an element of equity.
Medical scheme savings accounts are to be subjected to tax on the withdrawal of a cash bonus not used for medical purposes and on interest arising in the fund.
Employer contributions to benefit funds are to be disallowed as a deduction unless specifically catered for by a special section of the Act.
Employees are to be taxed on the amount of employer contributions exceeding the deductions allowed.
How is this different from the present situation?
Currently, benefit funds are exempt from tax. Contributions may or may not be deductible, depending on the nature of the fund and the circumstances of the taxpayer. Receipts of lump sum benefits or benefits that are not lump sums from medical type funds, are tax free.
For example, before tax deduction for individual's contributions to medical aid funds was limited, individuals and employers tended to contribute on a 50/50 basis. Now employers tend to make the full tax deductible contribution provided the employees' salary is adjusted to recognise that the employer is contributing more than previously.