Correct interpretation of changes in taxation of medical aid essential, says Softline VIP

With the new financial year imminent, companies should take care to verify that their payroll service providers are interpreting the changes to the Income Tax Act, 1962, as they apply to the taxation of medical aid in the payroll correctly, warns Karen Schmikl, tax legislation specialist at Softline VIP.

What this taxation change entails, in plain language, is that the full value of a company medical aid contribution is now taxable as a fringe benefit of the employee.

While these changes will have no effect on employees` net salaries, what this means for a company is that as the fringe benefit and therefore the taxable earnings of employees will be higher, therefore the company`s Unemployment Insurance Fund (UIF) contributions will be higher. Companies will also have to undertake, if not a software upgrade, at the very least a host of new calculations for those doing payroll manually.

But companies beware: several players in the industry, including payroll solution providers, have varying interpretations of the application of the income tax law changes, says Schmikl.

"VIP Payroll`s interpretation of the income tax law amendments has, however, been verified by the South African Revenue Service," she says.

Our interpretation is as follows, Schmikl continues: Previously, when processing medical aid in the payroll, a cap amount was used to determine the value of the medical aid fringe benefit as well as the value of the medical aid tax deductible deduction. This cap amount is prescribed by legislation and determined by the number of dependents on a fund.

According to the new changes to the Income Tax Act, cap amounts no longer apply when determining the medical aid fringe benefit. The full value of the company contribution is now taxable as a fringe benefit. The law does, however, still exempt employer medical aid contributions of employees who are 65 years or older at the end of the tax year, or employees who have retired due to superannuation, ill-health or infirmity, as a fringe benefit.

Employee contributions to a medical aid scheme are still tax deductible. When calculating the tax deductible value, the actual employee contribution and the deemed employee contribution (the medical aid fringe benefit value is deemed an employee contribution) is taken into account.

The cap amounts still apply to the total medical aid deduction to limit the benefit that the employee may receive. The contribution of employees who are retired due to superannuation, ill health or infirmity is also limited to the cap amount, says Schmikl.