It is well known that medical scheme contributions have already been converted to tax credits (at a rate of 30%), with effect from 1 March 2012. The next phase will be the conversion of “out-of-pocket” expenses to tax credits at a rate of 33.3%. This means that 40% marginal tax rate taxpayers will lose 6.67% of their “out-of-pocket” expenses. Such conversion is set to take effect 1 March 2014.
The latter conversion is, and has been, opposed by Bendels Consulting:
1. The rationale for the change is that 40% marginal rate taxpayers can afford to take the 6.67% “knock”. When considering disability tax law, it is the view of Bendels Consulting that the rationale is flawed. By its very nature, disability expenses are not discretionary. Our view is supported by the precise wording of the relevant legislation. Expenses can only be tax deductible if they are necessarily incurred in consequence of the disability. Experience shows that 40% marginal rate taxpayers struggle financially as a consequence of the disability. Many of our clients are reliant on family donations;
2. There is a fundamental difference between a tax credit and a tax deduction. Tax credits cannot be carried forward while assessed losses incurred as a consequence of medical expense tax deductions (and others) can be carried forward. To demonstrate our concern, If a person is incapacitated and as a consequence has no taxable income. It stands to reason that medical expenses in that year are likely to be substantial. Not being able to carry forward the losses can be financially crippling. This is considered to be inequitable – the individual may have been a 40% marginal rate taxpayer in prior-years.
Bendels Consulting raised the second concern several times at a Treasury Workshop (in Pretoria in August 2011). It is the intention of Bendels Consulting to continue with its opposition to the conversion of “out-of-pocket” expenses.