With the proposed new system, lower-income earners will obtain a greater tax benefit, and higher-income earners a smaller one.
Senior tax associate at Cliffe Dekker Hofmeyr, Andrew Seaber said last week the Treasury considered the deduction regime inequitable as it afforded a greater benefit to high-income taxpayers through the progressive marginal rate structure.
The idea behind the change was that the fiscus should contribute to household medical expenses on the basis of health needs, irrespective of income or economic output.
"National Treasury also believes a tax credit system will facilitate the long-term goal of a national health insurance system where all taxpayers make an equitable fiscal contribution to health insurance," Seaber said.
Associate director at KPMG Johan Troskie described the proposed changes as "a misguided sense of equity".
However, he said the principle of an equitable system, which is driving the changes, was commendable. He also questioned the wisdom of prejudicing higher-income earners who were providing for their own medical care, given the context of medical care in South Africa.
The state should rather incentivise taxpayers who provided for their own medical care and retirement, Troskie said.
The unfairness lies in the fact that not everybody has equal opportunities to good medical care. One cannot blame higher-income earners for this, but one can blame the state for neglecting and mismanaging its responsibility to provide quality medical care, Troskie said.
"How does one justify such changes at a time when the state stands accused of negligence and mismanagement?" He said people earning around R500 000 per year would be paying more tax with the new system.
The first phase of the tax credit system came into effect on 1 March this year. The first phase allows for a part-credit and part-deduction regime in respect of taxpayers under the age of 65.
The thinking is that the full tax credit system will be less costly, with less opportunity for arbitrage where expenses are inflated to gain a greater tax benefit.
Finance Minister Pravin Gordhan announced in his February budget that monthly tax credits would be increased from R216 to R230 for the first two beneficiaries, and from R144 to R154 for each additional beneficiary from 1 March this year.
Seaber said in the first phase, alongside the tax credit, a taxpayer under the age of 65 was also entitled to a deduction of a portion or percentage of the out-of-pocket expenses, thereby creating a hybrid system of deductions and credits.
In phase one, taxpayers who are 65 and older will continue to qualify for deductions on all contributions to medical schemes and out-of-pocket expenses. This will continue until 1 March 2014.
Source: Business Day via I-Net Bridge
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