RSA: Legislative Changes not Affecting the System

There are instances where medical scheme contributions are paid by more than one taxpayer on behalf of a person that is a dependant of those taxpayers, for example, children jointly contributing towards their mother’s medical scheme contributions under a registered medical scheme (even though the children are not the principal/main members of that medical scheme). Although medical scheme contributions are being shared, there was an unintended anomaly in the tax legislation that allowed each of the taxpayers (e.g. the children) who shared the medical cost for a dependant (e.g. the mother) to independently claim the full medical tax credits.

 

This was applied when the employee filed his/her personal income tax return, i.e. medical scheme fees tax credits and additional medical expenses tax credits claimed for medical scheme contributions (where the taxpayer is not the principal/main member of the medical scheme) in respect of any person that is a dependant of that taxpayer.

 

From 1 March 2018, in order to rectify this anomaly, amendments were made to section 6A so that where taxpayers (e.g. the children) share medical scheme contributions in respect of their dependants (e.g. the mother), medical tax credits should be allocated/split between the taxpayers who made the medical scheme contributions proportionally to the contribution made by each taxpayer.

 

For this purpose, dependant means :

 

• a person’s spouse;

• a person’s child and the child of his or her spouse;

• any other member of a person’s family in respect of whom he or she is liable for family care and support; and

• any other person who is recognised as a dependant of that person in terms of the rules of a medical scheme or fund contemplated in section 6A(2)(a)(i) or (ii)

 

Paragraph 9(6) of the Fourth Schedule give employers the discretion to decide whether o account for private medical scheme contribution tax credits in their payroll, or not. Therefore, the legislation will allow the employer to apply the above apportionment requirement on the payroll for private medical scheme contributions.

 

However, according to the Final Response Document on the Taxation Laws Amendment Bill 2018, SARS will provide clarity regarding the administrative requirements with regards to the splitting of the medical scheme fees tax credits.

 

Even though the legislation provides for employers (at their discretion) to apply the apportionment requirement on the payroll, SARS still has to provide clarification on the administrative requirements i.r.o how to apply the apportionment calculation, therefore, the system will not be implementing these amendments for now. The employee will still be able to claim these medical scheme fees tax credits on assessment when filing his/her personal income tax return.

 

This is deemed to have come into operation on 1 March 2018 and applies in respect of years of assessment commencing on or after that date.

Before March 2018, the legislation did not make provision for a fund to change the contribution certificate where the fund made an error in calculating the fund member category factor or if the fund member category factor changed during the year.

 

From March 2018,

 

• when an error occurred in calculating the fund member category factor, a corrected contribution certificate must be supplied to the employer and the corrected certificate is effective from the first day of the month following the month during which that corrected certificate was received, and

• where the fund member category factor changes during the year of assessment, the contribution certificate with the new fund member category factor must be supplied to the employer no later than one month after the day on which those changes become effective.

 

This is deemed to have come into operation on 1 March 2018 and applies in respect of years of assessment commencing on or after that date.

Background: According to paragraph 2(l) of the Seventh Schedule to the Income Tax Act, employer contributions to a retirement fund (for the benefit of the employee) is a taxable fringe benefit in the hands of the employee. Further, according to paragraph 4 of the Seventh Schedule to the Income Tax Act, any benefit granted to the employee by an associated institution in relation to the employer will be taxable in the hands of the employee and is deemed to have been granted by the employer. Associated institutions as defined in paragraph 1 of the Seventh Schedule to the Income Tax Act includes any fund established solely or mainly for providing benefits for employees or former employees of an employer.

 

Before March 2017, based on the above-mentioned provisions, any contributions made by an employer owned retirement fund into another employer owned retirement fund for the benefit of the employee created a taxable fringe benefit in the hands of the employee. This tax treatment also applied on transfers of actuarial surpluses between, or within retirement funds of the same employer.

 

Government is of the view that there should be no additional PAYE consequences for members of the fund if the transfers between, or within retirement funds of the same employer referred to amounts that have already been contributed to a retirement fund.

 

From 1 March 2017, there is no taxable fringe benefit in the hands of an employee in respect of the transfer of any surplus within, or between retirement funds of the same employer.

 

This is deemed to have come into operation on 1 March 2017 and applies in respect of years of assessment commencing on or after that date.

 

Before March 2019, the Act only allows transfers from a pension fund/provident fund to a retirement annuity fund after reaching normal retirement age but before retirement date.

 

From 1 March 2019, the Act also allows transfers from pension fund/provident fund to a pension preservation fund or provident preservation fund once a member reaches normal retirement age but before retirement date.

 

In addition, the single withdrawal applicable to preservation funds will not apply to transfers from a pension/provident fund to a pension preservation or provident preservation fund once the member reaches normal retirement age but before an election to retire.

The definition of ‘employee’ as defined in section 1 of the Employment Tax Incentive Act has changed to clarify that effective 26 July 2018, ETI can be claimed by the employer who pays remuneration to the qualifying employee in the case of an agreement between the labour broker/Temporary Employment Service provider (TES) and the client.

The annuitisation requirement of provident funds has been postponed for another two years from 1 March 2019 to 1 March 2021. The Minister of Finance shall table a report in the National Assembly, not later than 31 August 2020 in respect of the results of the discussions with the relevant stakeholders.