[FAQ] Gap cover and medical scheme tax credits

[FAQ] Gap cover and medical scheme tax credits

• 21 January 2021
• Individuals Tax
• Piet Nel

Background

The taxpayer belongs to a medical aid. During 2020 he received refunds from his gap cover. He wants to claim the difference between his monthly contributions and the refunds paid during the year under medical expenses not covered by the medical aid (code 4034).

Does the Income Tax Act make provision for this as part of the medical tax credit that can be claimed?

Answer

The Income Tax Act

Medical insurance falls under a different insurance category to medical aid plans, or medical schemes. The premiums paid under such an insurance policy will not constitute contribution to a medical scheme as envisaged by section 6A of the Income Tax Act. They would also not be qualifying medical expenses for purposes of section 6B. In terms of section 6B(1) ‘qualifying medical expenses’ (for purposes of the additional medical expenses tax credit) means “amounts (other than amounts recoverable by a person or his or her spouse) which were paid by the person” which were paid to registered medical practitioners, nurses (and nursing) and pharmacists. In essence, the problem is that the premiums paid to the insurer doesn’t qualify under either section 6A or 6B.

When the event, insured against, happen, there is an accrual to the insured. The question is whether this means that the cost medical expenses were recoverable.

The SARS Guide on the Determination of Medical Tax Credits and Allowances states that “in order for the expenses to be considered deductible, the expense must not have been recoverable from the taxpayer’s medical scheme.” The Act however doesn’t refer to a medical scheme when the word recoverable is used. We submit that the word must therefore take its ordinary meaning.

The courts have only dealt with the words “recover of recoup” – see the Omnia Fertiliser case. The Oxford dictionary defines recoverable as “(Of compensation or money spent or lost) able to be regained or secured by means of a legal process or subsequent profits”.

It is possible for the taxpayer to argue that, at least to the extent that the premiums were paid to the insurer, they will not be seen as a recovery. It comes down to the onus of proof. To that extent, the section 6B rebate will be available in respect of the full amount of the qualifying expenses.

The section 6B rebate is then available in respect of the actual expenditure paid.

SARS, in issue 11 of the guide, agrees with this view. We copy from paragraph 2.2.3:

“Certain medical-related arrangements are entered into between taxpayers and entities that are not regulated by the MS Act. Products offered by long-term or short-term insurers, which can include, for example, gap cover or hospital insurance, do not qualify for a Medical Tax Credit because they are not paid to a registered medical scheme. Certain bargaining councils establish and operate medical aid funds. If these funds are not registered under the MS Act, the contributions do not qualify for a Medical Tax Credit.”

Webinar Commentary

Further webinar commentary on Section 6A & 6B Medical Credits can be accessed here.

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