SARS’s application of the additional medical scheme fees tax credit for prescribed expenditure: a rule of law violation?

• Jurisdiction: South Africa
• Pages: 57-78
• Published date: 22 May 2020
• Citation: (2019) 5(2) JCCL&P 57
• Author: Moosa, F.
• Date: 22 May 2020

57

SARS’s APPLICATION OF THE

ADDITIONAL MEDICAL SCHEME

FEES TAX CREDIT FOR PRESCRIBED

EXPENDITURE: A RULE OF

LAW VIOLATION?

Fareed Moosa*

Head of Department (Mercantile and Labour Law)

University of the Western Cape

ABSTRACT

Tax administration by the South African Revenue Service (SARS) is

subject to constitutional control. As such, all SARS’s administrative

processes must adhere to the rule of law, a founding constitutional

value. This article argues that certainty, fairness, legality and

rationality are basic principles of this value that must underpin SARS’s

application of the rules governing the assessment of a taxpayer’s

claim to benefit from the additional medical scheme fees tax credit

provided for in s 6B(2) of the Income Tax Act 58 of 1962. This article

shows that, in practice, SARS uses its examples of ‘qualifying medical

expenses’ as legal yardsticks for determining whether a tax credit

ought to be granted. The nub of this article is its hypothesis that this

practice is antithetical to the principles engrained in the rule of law

and, as such, does not pass muster. Consequently, the key contention

made here is that any disallowance of a rebate on the basis that a

taxpayer failed to satisfy any requirement in a listed example is

justifiable grounds for an objection and appeal to be lodged under

the Tax Administration Act 28 of 2011. Finally, this article argues

further that a taxpayer is entitled to a rebate under s 6B(2) read with

para (c) of the definition of ‘qualifying medical expenses’ in s 6B(1) of

the Income Tax Act if the following two-legged test is met: First, the

expense must be ‘prescribed’ by the Commissioner of SARS. Secondly,

the expense must be ‘necessarily incurred and paid’ by the taxpayer

‘in consequence of any physical impairment or disability’ that is

suffered by the taxpayer personally or by any person qualifying as a

‘dependant’ of the taxpayer.

* B Proc (UWC), LLB (UWC), LLM (UCT), LLD (UWC).

(2019) 5(2) JCCL&P 57

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(2019) 5 (2) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

Key words: additional medical scheme fees tax credit; disability;

necessarily incurred qualifying medical expenses; rule of law; tax

administration; tax rebate

I INTRODUCTION

Prior to 2012, South Africa (SA) applied, for purposes of the Income Tax

Act,1 a deduction system that granted tax relief for medical expenses.

Subject to prescribed limits, natural persons were granted allowances

for contributions made to medical schemes and for out-of-pocket

expenses paid to service providers (such as, doctors, dentists and

the like). These allowances were deducted from a taxpayer’s income

which minimised taxable income and, hence, reduced a tax liability.

In certain instances, these deductions resulted in a refund being

paid by the South African Revenue Service (SARS). This deduction

system caused vertical inequity: taxpayers paying income tax at the

higher marginal rates received greater financial benefits by way of

deductions for the same amount of expenditure than taxpayers on

the lower marginal tax rates. To eliminate this inequity, and promote

horizontal equity among taxpayers, from 2012, SA commenced a

phased-in process of converting to a tax credit system for private

medical expenditure. This entailed, inter alia, a repeal of s 18 of the

ITA and the introduction of a two-tiered credit system in ss 6A2 and

6B.3 Comparatively, a key difference between the old and the new

system is that, in the case of the latter, tax relief for medical expenses

operates as a rebate against income tax payable to SARS. This means

that the rebate is, essentially, beneficial only to those natural persons

with an assessed tax debt arising in a particular year of assessment.

Furthermore, since the tax credit is, unlike before, limited to the

1 Act 58 of 1962 (ITA).

2 Section 6A(1) provides for a rebate known as the medical scheme fees tax credit.

The rebate amount is calculated in accordance with a formula in s 6A(2) and

comprises all qualifying contributions paid to a registered medical scheme for

the taxpayer or a ‘dependant’ as defined in s 1 of the Medical Schemes Act 131 of

1998.

3 Section 6B(2) provides for a rebate known as the additional medical scheme

fees tax credit. The rebate amount is computed in accordance with s 6B(3).

It comprises all ‘qualifying medical expenses’ as defined in s 6B(1) which are

incurred by the taxpayer personally or a ‘dependant’ as defined in s 6B(1). The

definition thereof includes the taxpayer’s spouse, child, and any other family

member for whom the taxpayer is liable ‘for family care and support’. In my

view, the use of the word ‘liable’, as opposed to ‘responsible’, indicates that

the liability in question must exist in law (such as, a duty to support a parent

or grandparent). For purposes of determining whether a duty of this nature

exists as a matter of law, see Paixao v RAF 2012 (6) SA 377 (SCA), SS v Presiding

Officer of the Children’s Court: District of Krugersdorp 2012 (6) SA 45 (GSJ) and

CM v NG 2012 (4) SA 452 (WCC).

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