Top income earners will get taxed instead of super rich

Some market commentators predict that finance minister Pravin Gordhan will introduce a wealth tax on the country’s super-rich, but Johan Lombard, an actuarial specialist at Momentum Health, believes that Treasury will extract higher taxes from top income earners by means of small tweaks to the current system.


Lombard illustrates that the medical schemes environment offers up some prime examples of how the overall tax burden can be shifted from lower to higher income earners without undue stress. In the 2012/13 tax year, for example, Gordhan announced significant changes to the tax treatment of medical schemes contributions.


Under the old system taxpayers qualified for a set monthly deduction on their taxable income based on their family composition. The new system ensures the same monetary benefit to everyone in the form of tax credits. Momentum Health expects that Gordhan will raise the threshold for the medical scheme tax credit in line with inflation next Wednesday.


“The most significant change in the 2013/14 budget could stem from last year’s proposal that a percentage of taxpayers’ out-of-pocket medical expenses be converted into a tax credit too,” says Lombard. “The impact will be similar to the change in treatment of scheme contributions in that those that earn above the 30% tax threshold will be taxed a bit more and those below a little less.”


Lombard illustrated the impact of this proposal in the following way, using Joe Average a R600 000 per annum income earner who is taxed at 40% and incurs R100 000 in additional medical expenses (defined as qualifying medical expenditure that is not covered by a medical scheme).


“Under the existing tax regime Joe is entitled to a tax deduction for every rand in additional medical expense that he incurs exceeding 7.5% of his gross salary – anything he spends in excess of R45 000 (R600 000 x 7.5%). He therefore receives financial benefit of R22 000 (40% x R55 000),” explained Lombard.


He added: “On the proposed tax credit system Joe will in all likelihood get a tax credit in the region of R16 500 – R55 000 x 30%, based on the assumption that the tax credit system on additional medical expenses replicates that of the tax deduction system at 30% presently.


He advises taxpayers to ensure that accurate records of all uncovered medical expenses are kept and that their medical scheme fits their healthcare needs. “Because the tax credits are fixed in nature, individuals can benefit by selecting more cost-effective options within their medical schemes that still meet their healthcare needs,” says Lombard.


He believes the best way to reduce medical expenses is to look after your health. “Any investments in your health today – through healthy eating and exercise – will be of great emotional and financial benefit over the long term,” said Lombard. “A healthy lifestyle will counteract the erosion of your take home pay due to budget changes as well as reduce government’s healthcare provisioning burden.”