In his latest budget speech, Health Minister Aaron Motsoaledi has proposed that government withdraw tax incentives to medical aid schemes in order to create a transitional National Health Insurance (NHI) fund.
The current value of these medial aid tax credited are said to be in the region of R20 billion. According to Econex, in 2014/15 the total amount paid to principal members of medical schemes in the form of medical scheme tax credits was approximately R18.5 billion. The Minister proposed that these credits should be channelled to improving the poorest citizens’ access to healthcare the NHI scheme.
The NHI has been introduced to provide health care for all South African citizens and will eventually do away with the need for medical aid. The NHI will be a mandatory prepayment of care. This means once the law is passed it affects all citizens in the country, they will have to belong to the fund, therefore they won’t have a choice.
The minister said that the first step towards implementing the NHI is to pick up those who are outside the system of medical aids and provide services for them through the NHI Fund. This is to be created from, amongst other sources, the R20 billion tax credits.
Medical aid tax credits were introduced and made effective from 1 March 2012. A medical scheme contribution credit (S 6A credit) will be available to taxpayers who belong to a medical scheme, set at a fixed amount per month for the taxpayer and first dependant, and two thirds of this amount for additional dependants, adjusted annually for inflation.
There is also a supplementary medical scheme contribution credit (S 6B credit) for members or dependants aged 65 and above, and members or dependants with disability.
The s 6A credit must be deducted in the calculation of the normal tax payable by the natural person who paid the contributions to the medical scheme. The s 6A credit applies in respect of fees paid by the person to a registered medical scheme or a fund registered under similar provisions contained in the laws of any other country where the medical scheme is registered
Certain excess medical scheme fees and qualifying medical expenses are taken into account for an additional medical expenses tax credit in terms of s 6B. The system of the s 6B credit has three categories, namely i) taxpayers of age 65 and above, ii) taxpayers with a disability factor, and iii) all remaining taxpayers.
In 2015/16, principal members received R270 per month in tax credit for principal membership, R270 per month for the first beneficiary, and R181 per month for each of the remaining beneficiaries for whom they paid contributions.
This translates to a R3240 tax return for a single medical aid member, up to R13 0000 for a member with four beneficiaries.
By taking the tax credit away, the effective monthly cost of a medical aid increases, making it less affordable. Because these tax credits are a static payment (they remain the same no matter what medical aid scheme members are on), taking them away will impact low-cost medical aid members more than expensive schemes.
For example, a medical aid member paying R820 a month for insurance, after taking into account the credit the credit rate is R584. With the tax credit removed, the member is effectively paying the full price, which is over 40% more each month, according to Econox.
The below table shows the percentage change in medical aid contributions after the tax credit.
Econex said that an affordability threshold of 12.85%, the percentage of monthly expenditure toward medical health that is still “reasonable”, almost two million medical aid members will be pushed into levels where they simply cannot absorb the costs.
Econex further said that the removal of medical scheme tax credits will therefore affect poorer medical scheme beneficiaries disproportionately. In total, 21.86% of medical scheme beneficiaries will move above the affordability threshold with the removal of tax credits, this equated to 1.9 million beneficiaries in 2016.
The argument from Government will be that once the NHI fund is in operation it would not matter that medical aid members can no longer afford their respective medical aids as the NHI fund will replace these medical aids. The question remains then on how long it will take to get the NHI fund fully operational. Until then there are a lot of people who will essentially lose their medical aids due to unaffordability.
The idea to have a unilateral fund so that all the people of South Africa can have access to proper health care is a noble one and one that we should strive for. But to date Government have not instilled confidence in their ability to manage funds effectively and until this issue is solved there are millions of South Africans that are going to be adversely affected by this.
Make sure you have the right people in your corner to navigate you and your business through the ever changing and turbulent waters that is tax and law.
Gerhard Linde, master tax practitioner 31 August 2017
Barnard Inc is an attorneys firm in Centurion, Pretoria.
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