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For consumers and employers alike, one of the most important features to come out of the 2006 Budget is the confirmation of the change in the way medical scheme contributions will be treated for tax purposes from March 1, 2006.

James van Vught, principal officer of Oxygen Medical Scheme says that these changes create opportunities for both companies and individuals to save money by improving their tax planning through membership of a medical scheme.

Previously, for individuals whose employers paid their medical scheme contribution on their behalf, up to two-thirds of the contribution was tax-free.

They were also able to deduct any further medical expenses not recoverable from the medical scheme that exceeded five percent of their taxable income at the tax year-end.

In contrast, individuals who did not have their employer paying their medical scheme contribution on their behalf only enjoyed the latter of these two benefits, placing them at a comparative disadvantage.

Equitable treatment

Now, says Van Vught, all taxpayers are treated equally.

"Firstly, all individuals may deduct their full medical scheme contributions from their taxable income, subject to a maximum monthly amount which is based on family size," he says.

"For each month during the tax year that a beneficiary enjoys cover under a medical scheme membership, up to R500 of contribution may be deducted for the first beneficiary (the taxpayer), R500 for the second, and R300 for each additional beneficiary. These amounts do not discriminate between adults and children, so a single parent of one child qualifies for a maximum R1000 tax-deductible threshold, as will a couple with no children.

"The changes to the tax laws will result in significant savings for many people. For example, a couple with a R1000 medical scheme contribution being paid by the employer on their behalf, would previously have received only two thirds (R666) of the contribution tax-free. Under the new tax laws, they will receive the full contribution tax-free due to the maximum R1000 tax-deductible threshold."

Bad news too

Secondly, says Van Vught, the threshold at which all individuals may deduct any medical expenses and post-tax medical scheme contributions from taxable income has been increased from five percent to 7.5 percent. "This is bad news for all taxpayers."

He cautions that in light of this higher medical expense threshold, individuals need to think carefully when choosing their level of cover.

"Although it may be tempting to try and purchase a benefit option that is close as possible to 100 percent tax deductible, families should first consider the level of cover they need and not base their decisions solely on the tax treatment."

Pensioners, disabled can still claim

Van Vught mentions that under the new tax laws, any persons over 65 years of age, or physically disabled, will still be able to deduct 100 percent of medical expenses from taxable income.

"Contributing to a medical scheme is now a tax-effective vehicle for more people, and the costs associated with medical scheme membership can be reduced due to the generous tax rebate."

Employers could change policies

On opportunities for employers, Van Vught says that previously, when an employer paid the medical scheme contribution on behalf of the employee, two-thirds of the contribution was tax-free for the employee. This has now fallen away, and replaced with the 100 percent deductibility subject to the monthly cap based on family size.

Van Vught says this change may lead to a change in subsidy policy for employers (limited to the tax-deductible threshold), and certainly to a change in purchase behaviour amongst staff. "Because two-thirds of the contribution was always tax-deductible, it meant that the more the employee paid for medical cover, the more tax relief was received. This is no more, and the result will be a review of both the subsidies given and the monthly contributions paid."

He says the real opportunity for employers comes in two areas: "Firstly, contribution rates on most low-income options will be below the tax- deductible threshold. This means that an employer choosing to subsidise their low-income staff 100 percent will be able to provide them cover with absolutely no tax implications to the employee.

"Secondly, should an employer pay the contribution on behalf of the employee (via salary sacrifice or via subsidy) then the employee will enjoy the tax deduction monthly. This is a vast improvement in cash flow for the employee, and puts them in a far better position than an employee who pays in their private capacity and claims it as a tax deduction at the tax year-end."

I-Net Bridge