New tax information for medical aid and retirement funding

23 February 2011

Although there were no major surprises in the 2011/2012 budget speech, some proposed amendments were made in the spheres of retirement funding and medical aid. The following information, taken from the SARS website, highlights these changes with regard to tax deduction formulas: 

Pension fund contributions

7,5% of remuneration from retirement-funding employment or R1 750, whichever is the greater, will go towards a pension or provident fund. Retirement-funding employment refers to income which is taken into account to determine contributions to a pension or provident fund. Excess contributions are not carried forward to the next year of assessment, but are accumulated for the purpose of determining the tax-free portion of the lump sum upon retirement.

Arrear pension fund contributions

Up to a maximum of R1 800 per year will be contributed. Any excess may be carried forward.

Current retirement annuity fund contributions

15% of taxable income from non-retirement-funding employment, or R3 500 less current contributions to a pension fund, or R1 750, whichever is the greater, will be contributed. Any excess may be carried forward.

Reinstated retirement annuity fund contributions

Up to a maximum of R1 800 per year will be contributed. Any excess may be carried forward.

Medical expenses and medical aid deductions

65 years and older: May claim all qualifying expenditure incurred and medical aid contributions paid by the taxpayer or employer.

Younger than 65 years: May claim medical aid contributions, paid by the taxpayer or employer, up to the capped amount and qualifying expenditure to the extent that it exceeds 7,5% of taxable income before this deduction.

Younger than 65 years (but with an immediate family member who has a disability): If the taxpayer, spouse or child (including an adopted child or stepchild) has a disability, the deduction includes all qualifying expenditure and medical aid contributions paid by the taxpayer or employer.

• The capped amount is calculated at R720 (2011: R670) for each of the first two beneficiaries and R440 (2011: R410) for each additional beneficiary as defined by the medical aid fund.

• Qualifying expenditure includes: own contributions to medical aid funds in excess of the capped amount, medical aid fringe benefit determined by the employer in excess of the capped amount, payments to medical practitioners, nursing homes and hospitals, payments to pharmacists for prescribed medicines, payments for physical disabilities, including remedial teaching and expenditure incurred for mentally handicapped persons, and payments for the benefit of any dependents.

Disability means a moderate to severe limitation of a person’s ability to function or perform daily activities as a result of physical, sensory, communication, intellectual or mental impairment, if the limitation lasts more than a year and is diagnosed by a registered medical practitioner.

• Recoveries of expenses (including amounts received from medical aid savings account) reduce the claim.

• Expenditure paid by a taxpayer on behalf of a spouse or children must be claimed by the spouse who paid the expense.

 

Retirement lump sum benefits 2011/2012

The taxable portionof a lump sum from a pension, provident or retirement annuity fund on retirement or death is the lump sum less any contributions that have not been allowed as a tax deduction plus the taxable portion of all lump sums previously received. This amount is subject to tax at the following rates less any tax previously paid.

 

Taxable portion of lump sum Rates of tax
0 - R315 000 0%
R315 001 - R630 000 0 + 18% of any amount over R315 000
R630 001 - R945 000 R56 700 + 27% of any amount over R630 000
R945 001 and above R141 750 + 36% of any amount over R945 000

 

Withdrawal lump sum benefits 2011/2012

The taxable portionof a pre-retirement lump sum from a pension or provident fund is the withdrawal less any transfer to a new fund plus all withdrawal lump sums previously received. This amount is subject to tax at the following rates less any tax previously paid.

 

Taxable portion of lump sum Rates of tax
0 - R22 500 0%
R22 501 - R600 000 0 + 18% of any amount over R22 500
R600 001 - R900 000 R103 950 + 27% of any amount over R600 000
R900 001 and above R184 950 + 36% of any amount over R900 000

 

Proposals for 2012

Retirement Funding: From 1 March 2012, an employer’s contribution to retirement funding will be treated as a fringe benefit. Employees will be allowed to deduct up to 22,5% of taxable income for contributions to pension, provident and retirement annuity funds, subject to a minimum of R12 000 and a maximum of R200 000 per year.

• Medical Deductions: From 1 March 2012, monthly contributions to medical schemes and qualifying medical expenses will be converted into tax credits and not treated as deductions.