Salary sacrifice schemes, commonly used to make medical aid contributions tax-free, and certain payments from medical savings schemes could be squeezed if recommendations in the latest Katz Commission report are accepted by the government.
In the Sixth Interim Report on benefit funds released this week, the Katz Commission has proposed making salary sacrifice schemes less attractive and levying a withholding tax on interest credited to and withdrawals from the relatively new medical savings accounts.
A salary sacrifice scheme is based on you, the employee, giving up a portion of your taxable salary in return for your employer spending that amount in meeting contributions to a medical or other benefit fund. Salary sacrifice schemes are mainly of interest if you are in one of the higher tax brackets.
The Katz Commission recommends that employers' ability to deduct from taxable income their contribution to medical schemes on behalf of their employees be limited to a "rand-for-rand" basis.
So for every R1 contributed by employees, employers can contribute another R1 and claim it as a deduction from taxable income. This will not eliminate the attractiveness of salary sacrifice schemes but it will reduce them.
Those who are self-employed will be allowed to deduct from their taxable income 50 percent of their contributions to a registered medical scheme.
Medical savings accounts, which encourage members to moderate medical claims by returning some of their unspent contributions, raise the problem of interest on the accounts which does not always fall into the tax net.
The Katz Commission proposes that, since these contributions were built up at least partly from tax-deductible contributions, cash withdrawals from and interest credited to medical savings accounts should be taxed.
Cash withdrawals are any payment, excluding a transfer to another registered medical scheme, that is not a bona fide payment for medical expenses.
The commission suggests the same withholding tax should be applied to bonuses to reward members for no or low claims.
The report also urges that SITE taxpayers who have high medical expenses be monitored. If you are a SITE taxpayer, you only render a tax return and claim a refund of tax if you incurred exceptionally high medical expenses.
Since easing the burden on the tax system depends on SITE returns being kept to a minimum, it may be necessary to revise the percentage of income spent on medical expenses that triggers a tax reassessment.