Medical Deductions and Tax

[Dave U]

Hi All,

I have a problem and I am hoping that someone can shed some light on the issue I have:

Lets say I earn R 10 000.00 basic a month
The employer contribution to the medical fund is R448.00
The employee's contribution to the medical fund is R700.00

So in effect what happens is that the total contribution to the medical fund is R1 148.00. The employer pays this over to the fund and deducts R700.00 from the employee.

Now what will the fringe benefit be if there is one and how will this affect the taxable income of the employee? (2010 and 2011 tax year)

I'm so confused!

Hi Taxibum

From this year onwards, the R448 employer contribution is a fringe benefit, bringing the employee's taxable income up to R10,448. But from that amount you must deduct the allowable medical aid deduction, which will depend on the number of dependants the employee has. Let's say the employee has no dependants, then the maximum deduction is R670, so he'll be taxed on R10,448 - R670.

Now, let's say he has 1 dependant. In this case, the maximum deduction is R1,340. But because the total contribution is only R1,148, that will be the deduction. So he'll pay tax on R10,448 - R1,148.

[Taxibum]

Thank you Dave U!

How did this work for the previous year and how does it differ?

[Dave U]

Thank you Dave U!

How did this work for the previous year and how does it differ?

Let's pretend the maximum deduction with 0 dependants was also R670 last year. Now, last year a fringe benefit only materialised if the employer contribution was larger than the maximum deduction. In this case, because the R448 employer contribution is less than R670, there is no fringe benefit.

So, because there is no fringe benefit, the employee's remuneration was R10,000, not R10,448 as it is this year. But the allowable deduction was reduced by the employer contribution amount last year, so R670 - R448 = R222 is the allowable deduction, so the employee was taxed on R10,000 - R222.

If you work this out, you'll see that the employee will be taxed on exactly the same amount this year as last year! The only difference is in the UIF. Last year, the UIF leviable amount for the month would have been R10,000. This year it is R10,448. That is because the whole employer contribution is now seen as a fringe benefit, which is a form of remuneration, and UIF is calculated on remuneration. (with specific exclusions of course)

There's a "Thanks" button under my posts, not sure it makes all that much difference, but you might as well use it