[FAQ] Medical expenses paid on behalf of an employee

[FAQ] Medical expenses paid on behalf of an employee

• 28 June 2021
• Individuals Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

On compassionate grounds, the employer paid doctor's consultations and tests for an employee, who is not on medical aid and cannot afford it. The employer does not contribute to a medical scheme on the employees’ behalf.

What are the tax implications for both the employee and the employer?

Answer

Income Tax Act

With any transaction, there are always two sides, e.g. the payor and the recipient; the employer and the employee. In certain cases, where a transaction is for the benefit of a third party(s), there may be more parties involved. This is the case where an employer pays for an employee’s doctor’s consultation etc. The matter is further complicated if there are one or more tax obligations involved such as in the present case. 

Employees tax position for the employer

In terms of paragraph 12B of the Seventh Schedule to the Income Tax Act, medical expenses (not contributions) paid by the employer on behalf of the employee is a taxable benefit. The value of the amount paid by the employer must be completed under codes 3813 (benefit) and 4024 (medical expenses).

If the employer’s intention is that the employee should receive the same net cash amount, the employer can gross-up the employee’s salary with the additional tax payable. However, since this would then also constitute a fringe benefit in turn (payment of the employee’s income tax), the additional fringe benefit would in turn need to be reported on the IRP5 (payment of an employee’s debt) and grossed up to end with the same net cash.

Individual income tax position(as employee)

The benefit is taxable as a fringe benefit and eventually included in “gross income”. Depending on the individual’s personal circumstances, they may qualify for a rebate in terms of section 6B of the Income Tax Act.

Employer’s income tax position

As you stated, in order to be deductible for income tax purposes, an amount must be expended in the production of income, and for the purposes of trade. Since the employer had no legal obligation to make payment regarding the medical services, arguably since the expense was gratuitous, the expense is not deductible for tax purposes.

Webinar Commentary

For further commentary refer to the following webinar: Individual Taxpayer Crash Course here.

0 COMMENTS

LEAVE A COMMENT