Tax law and medical science – the twain have met!

For approximately 20 years there had been a provision in our tax law that allowed taxpayers to deduct all their “qualifying medical expenses” where the taxpayer, his or her spouse, or child was regarded as a “handicapped person”. A “handicapped person” was, broadly defined as (a) a blind person (b) a deaf person (c) a wheel chair user (d) a person who required an artificial limb and (e) a person who suffered from a mental illness.

Usefully, SARS and The National Treasury recently released the 2009 Tax Statistics. The Tax Statistics cover the 2005 to 2008 tax years. The statistics, as they relate to medical expenses and “handicapped persons” are as follows: 3.807 million, 3.857 million, 3.580 million and 2.611 million taxpayers were assessed in the tax years 2005 to 2008, respectively. But, yet only 14 075, 13 078, 15 070 and 20 407 (for the 2005 – 2008 years, respectively) have claimed all their medical expenses under the “handicapped person” definition, or as the statistics reflect it, under the disabled code – “4009”. Respectively, only 0.37%, 0.34%, 0.42% and 0.78% have claimed under code – “4009”.

In the writer’s opinion that these statistics bear no correlation to the reality of the situation and It is unlikely that any expert commentator would disagree with such an opinion.

Notwithstanding this, there is a glimmer of hope for those taxpayers who have not claimed (and could have) for previous years. In terms of the law, they can re-open their assessments going back three years from the date of their last assessment.

With effect from 1 March 2009, the definition of “handicapped person” has been deleted and replaced by a new “disability” definition. Broadly, a “disability” is defined as a moderate to severe limitation of a person’s limitation to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment, if such limitation has lasted or has a prognosis of lasting more than one year and is diagnosed by a registered healthcare practitioner on a form prescribed by the SARS Commissioner. The prescribed form needs to be signed by the healthcare practitioner.

It is the writer’s opinion that the new definition will apply to many more taxpayers. A view publicly expressed on this issue, in January 2010, by one of the country’s leading firm’s of tax advisors, states that the amended definition does provide relief to a wider population of “disabled persons”.

In the writer’s opinion, after having done extensive research on the number of medical related illnesses and disabilities, conservatively, at least 10% of our taxpaying population should be able to claim all their medical expenses (as there is more than a 10% chance that the taxpayer, his or her spouse has a “disability”). Using the 2008 statistic of 5.55 million registered taxpayers, the 10% conservative figure would imply that 550 000 taxpayers could make the appropriate claims. Notwithstanding the overwhelming evidence, for many reasons the conservative figure of 550 000 potential claimants is nothing short of a “pipe dream”.

However, with the assistance of employers, the healthcare profession, advisors, medical schemes and their administrators, special needs schools, among many others, it is eminently possible that more than 100 000 taxpayers should claim all their medical expenses under the new “disability” provision for the 2010 tax year. The figure of 100 000, would, using the 2008 statistic, represent only 1.8%.

The amount of the deduction for each affected individual could be substantial as qualifying medical expenses include all medical aid contributions and expenses irrecoverable from the taxpayer’s medical aid scheme. In addition, there is a provision (the provision has to a large extent not been amended by the deletion of the “handicap person” definition) which allows the taxpayer to deduct any expenditure (capital and revenue in nature) necessarily incurred and paid for in consequence of any disability suffered by the taxpayer, his or her spouse or child. It is this latter provision which can result in substantial medical expense claims. The amount of the total “qualifying medical expense” claim allowable relates to medical expense of the taxpayer’s whole family and not just those expenses relating to the person with the “disability” (or “handicapped person”).

To put the issue into tax savings, a realistic figure of an average saving would be around R50 000 per year is more than realistic. The precise figure for each taxpayer will depend on their own facts and circumstances.

To ensure that the optimum tax benefit/refund is achieved, specialist tax law advice is recommended. A general understanding of each “disability” is required as well as the precise framework of the tax law provisions regarding the tax deductions for medical expenses. This is because the expenses necessarily incurred in consequence of each “disability” will depend on the precise facts and circumstances of each case (for example, one child within the autistic spectrum disorder may require different interventions than another child within the same disorder).

The SARS requirement for healthcare professionals to sign a tax declaration means that tax law and medical science are now inextricably linked!

TAXtalk: www.taxtalk.co.za

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