In South Africa, most large employers have implemented approved medical aid plans and options for their employees. While there are state hospitals that provide medical care, the standard of service provision varies greatly from hospital to hospital and across the region. Overcrowding is a common problem. Inadequate staffing levels and lack of resources are also something to contend with. Therefore, most employers insist that staff participate in the medical benefit options that they make available so that workers can be treated in private medical facilities. But providing employees with these benefits has an inevitable impact on payroll and tax disclosure. Here are two common scenarios below, each of which detail the necessary tax disclosures:
Medical benefits provided by employers through a registered medical scheme
Section 6A and paragraphs 2(i) and 12A of the Seventh Schedule to the Income Tax Act deal with legislation governing the taxation of medical benefits provided by an employer to an employee.
Under the terms of the legislation, a taxable benefit is “deemed to have been granted where the employer contributes directly or indirectly to a medical scheme on behalf of an employee and his/her dependants” (External Guide for Employers in respect of fringe benefits - PAYE-GEN-01-G02). This benefit is termed a fringe benefit, or benefit-in-kind in the Northern hemisphere.
Value to be placed on the benefit
As long as workers are still gainfully employed, the value of the benefit they receive will be the same as the amount of the contribution paid by their employer. If an employee retires but is still in receipt of a medical benefit, however, it has no value for fringe benefit tax purposes.
There are two further cases where this
situation applies. The first is where a pensioner’s dependants continue to be members of a medical aid or receive such benefits after the pensioner dies. But the proviso is that the pensioner must have retired as a result of receiving superannuation or due to ill-health or other infirmities.
The second case relates to the dependants of a deceased employee (employed at the date of death), who continue to receive medical benefits. In this scenario, although there is a fringe benefit, no value is placed on that benefit for tax purposes. However, it is still necessary to report the values for tax filing purposes.
Generally in South Africa, employers are billed by their medical service providers and the premium payable for each employee is reflected in their detailed billing document. But the situation is different where employers contribute one lump sum for the entire workforce and there is no separate billing per employee. Here the value of the benefit for each employee is worked out by dividing total fund contributions by the total number of workers and their dependents.
The legislation clearly states that tax must be deducted from the employee in the month in which the benefit accrues to them. This means that the time you choose to pay for the benefit does not trigger the fringe benefit tax.
Disclosure on employee tax certificates
There are four tax codes currently in use for disclosing medical aid payments and medical aid fringe benefits based on employer contributions made into an approved medical scheme. The table below lists the codes and provides a detailed description of their use/intention:
Tax code |
What is included |
|
4005 |
The fringe benefit value of the medical provision tax in the hands of employees (in terms of section 18 (5)) (The same value as disclosed under code 3810) |
|
3810 |
Employers contributions (paid on behalf of the employee - a fringe benefit) |
|
3860 |
(Relates to foreign service income so where income is reflected as code 3651) Employers contributions (paid on behalf of the employee - fringe benefit) |
|
4474 |
Contributions paid by the employer for workers not shown under code 4493. This includes contributions for an employee who is 65 years old but has not retired. (In South Africa, the retirement age is 65 years) |
|
4493 |
Contributions made where the “no” value provisions apply |
“A taxable benefit is ‘deemed to have been granted where the employer contributes directly or indirectly to a medical scheme on behalf of an employee and his/ her dependants’.”
Medical costs incurred by employers
Where employers do not contribute towards a registered medical scheme but either directly or indirectly contribute towards the provision of medical, dental, hospital services or medicines for workers or any of their dependants, these costs are also deemed to be a fringe benefit.
The sections of the tax legislation dealing with these situations are Paragraphs 2(j) and 12B of the Seventh Schedule.
Value to be placed on the benefit
As with the first scenario, the value ascribed to an employee is the actual cost incurred by the employer (directly or indirectly). Again, where the cost cannot accurately be assigned to an individual staff member, the total can be shared out between all employees and their dependants who make use of the service.
Doing this will enable you to arrive at the value per employee (Value of benefit = total cost incurred by the employer, divided by the entire number of employees and their dependants).
There are also a number of scenarios where the “no” value is placed on the benefits provided. One is where employers provide medical services to employees at their place of work. Many of the large mining and industrial manufacturing companies in South Africa have either a full-time qualified nursing sister and/or a medical doctor on their payroll in order to provide staff with medical services.
This situation means that employees can be treated during working hours, which reduces lost production time due to people having to travel to larger towns to receive help. Basic prescriptions are also usually dispensed by the on-site team.
Another case is when services are rendered or medicines supplied in order to comply with the Republic’s laws. In this instance, the three situations described in scenario one for which a “nil” value would be assigned to the benefit provided also apply.
These are:
• Any medical services supplied to the dependents of a deceased employee (if employed at the time of death)
• Any medical services provided to a pensioner and/or a pensioners’ dependents
• Where medical treatment, as listed in the prescribed minimum benefits by the Minister of Health in terms of section 67 (1) (g) of the Medical Schemes Act no.131 of 1998, is given to an employee or their dependents under the terms of a scheme or programme provided by their employer.
Disclosure on employee tax certificates
There are three tax codes that are used to record the benefit assigned to workers when employers have paid for the provision of a medical service. These are listed in the table below:
|
Tax code
|
What is included
|
|
3813
|
Medical costs incurred on behalf of the employee for medical, dental or similar services, the cost of medicines and hospitalisation or nursing services (The same value would be recorded under code 4024)
|
|
3863
|
(For foreign service income so where income is recorded as code 3651.)
Relates to medical costs incurred on behalf of an employee for medical, dental or similar services, the cost of medicines and hospitalisation or nursing services (The same value would be recorded under code 4024) |
|
4024
|
Cost of medical services deemed to be paid by the employee. |
There are a number of tax codes that apply to the basic provision of medical benefits in South Africa, which means that it is important for international companies or those wanting to establish a presence in the country to gather the correct information during payroll processing each month. Doing so will ensure that employee tax certificates are populated with the correct data – and if your data is accurate, your tax filing process will run smoothly.
After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the fields of training, tax issues and financial ICT management, including mergers and acquisitions. She progressed to a position within South African Revenue Services before moving on to Anglo American Property Services, where she became group financial director with responsibility for ICT and payroll. Sharon joined Praxima Payroll Systems in 2001 and steered the company through the development of its own software. It is now a provider of payroll services to some of the largest legal practices in South Africa. She moved to Celergo to take up the role of head of operations UK. She was tasked with rightsizing its operations and refining the payroll processes to improve productivity. Sharon was asked to take on the COO role at Praxima Holdings in 2013 and has helped the company extend its footprint into Africa and beyond. She is a registered tax practitioner and member of CIPP and GPA.
In South Africa, most large employers have implemented approved medical aid plans and options for their employees. While there are state hospitals that provide medical care, the standard of service provision varies greatly from hospital to hospital and across the region. Overcrowding is a common problem. Inadequate staffing levels and lack of resources are also something to contend with. Therefore, most employers insist that staff participate in the medical benefit options that they make available so that workers can be treated in private medical facilities. But providing employees with these benefits has an inevitable impact on payroll and tax disclosure. Here are two common scenarios below, each of which detail the necessary tax disclosures:
Medical benefits provided by employers through a registered medical scheme
Section 6A and paragraphs 2(i) and 12A of the Seventh Schedule to the Income Tax Act deal with legislation governing the taxation of medical benefits provided by an employer to an employee.
Under the terms of the legislation, a taxable benefit is “deemed to have been granted where the employer contributes directly or indirectly to a medical scheme on behalf of an employee and his/her dependants” (External Guide for Employers in respect of fringe benefits - PAYE-GEN-01-G02). This benefit is termed a fringe benefit, or benefit-in-kind in the Northern hemisphere.
Value to be placed on the benefit
As long as workers are still gainfully employed, the value of the benefit they receive will be the same as the amount of the contribution paid by their employer. If an employee retires but is still in receipt of a medical benefit, however, it has no value for fringe benefit tax purposes.
There are two further cases where this
situation applies. The first is where a pensioner’s dependants continue to be members of a medical aid or receive such benefits after the pensioner dies. But the proviso is that the pensioner must have retired as a result of receiving superannuation or due to ill-health or other infirmities.
The second case relates to the dependants of a deceased employee (employed at the date of death), who continue to receive medical benefits. In this scenario, although there is a fringe benefit, no value is placed on that benefit for tax purposes. However, it is still necessary to report the values for tax filing purposes.
Generally in South Africa, employers are billed by their medical service providers and the premium payable for each employee is reflected in their detailed billing document. But the situation is different where employers contribute one lump sum for the entire workforce and there is no separate billing per employee. Here the value of the benefit for each employee is worked out by dividing total fund contributions by the total number of workers and their dependents.
The legislation clearly states that tax must be deducted from the employee in the month in which the benefit accrues to them. This means that the time you choose to pay for the benefit does not trigger the fringe benefit tax.
Disclosure on employee tax certificates
There are four tax codes currently in use for disclosing medical aid payments and medical aid fringe benefits based on employer contributions made into an approved medical scheme. The table below lists the codes and provides a detailed description of their use/intention:
Tax code |
What is included |
|
4005 |
The fringe benefit value of the medical provision tax in the hands of employees (in terms of section 18 (5)) (The same value as disclosed under code 3810) |
|
3810 |
Employers contributions (paid on behalf of the employee - a fringe benefit) |
|
3860 |
(Relates to foreign service income so where income is reflected as code 3651) Employers contributions (paid on behalf of the employee - fringe benefit) |
|
4474 |
Contributions paid by the employer for workers not shown under code 4493. This includes contributions for an employee who is 65 years old but has not retired. (In South Africa, the retirement age is 65 years) |
|
4493 |
Contributions made where the “no” value provisions apply |
“A taxable benefit is ‘deemed to have been granted where the employer contributes directly or indirectly to a medical scheme on behalf of an employee and his/ her dependants’.”
Medical costs incurred by employers
Where employers do not contribute towards a registered medical scheme but either directly or indirectly contribute towards the provision of medical, dental, hospital services or medicines for workers or any of their dependants, these costs are also deemed to be a fringe benefit.
The sections of the tax legislation dealing with these situations are Paragraphs 2(j) and 12B of the Seventh Schedule.
Value to be placed on the benefit
As with the first scenario, the value ascribed to an employee is the actual cost incurred by the employer (directly or indirectly). Again, where the cost cannot accurately be assigned to an individual staff member, the total can be shared out between all employees and their dependants who make use of the service.
Doing this will enable you to arrive at the value per employee (Value of benefit = total cost incurred by the employer, divided by the entire number of employees and their dependants).
There are also a number of scenarios where the “no” value is placed on the benefits provided. One is where employers provide medical services to employees at their place of work. Many of the large mining and industrial manufacturing companies in South Africa have either a full-time qualified nursing sister and/or a medical doctor on their payroll in order to provide staff with medical services.
This situation means that employees can be treated during working hours, which reduces lost production time due to people having to travel to larger towns to receive help. Basic prescriptions are also usually dispensed by the on-site team.
Another case is when services are rendered or medicines supplied in order to comply with the Republic’s laws. In this instance, the three situations described in scenario one for which a “nil” value would be assigned to the benefit provided also apply.
These are:
• Any medical services supplied to the dependents of a deceased employee (if employed at the time of death)
• Any medical services provided to a pensioner and/or a pensioners’ dependents
• Where medical treatment, as listed in the prescribed minimum benefits by the Minister of Health in terms of section 67 (1) (g) of the Medical Schemes Act no.131 of 1998, is given to an employee or their dependents under the terms of a scheme or programme provided by their employer.
Disclosure on employee tax certificates
There are three tax codes that are used to record the benefit assigned to workers when employers have paid for the provision of a medical service. These are listed in the table below:
|
Tax code
|
What is included
|
|
3813
|
Medical costs incurred on behalf of the employee for medical, dental or similar services, the cost of medicines and hospitalisation or nursing services (The same value would be recorded under code 4024)
|
|
3863
|
(For foreign service income so where income is recorded as code 3651.)
Relates to medical costs incurred on behalf of an employee for medical, dental or similar services, the cost of medicines and hospitalisation or nursing services (The same value would be recorded under code 4024) |
|
4024
|
Cost of medical services deemed to be paid by the employee. |
There are a number of tax codes that apply to the basic provision of medical benefits in South Africa, which means that it is important for international companies or those wanting to establish a presence in the country to gather the correct information during payroll processing each month. Doing so will ensure that employee tax certificates are populated with the correct data – and if your data is accurate, your tax filing process will run smoothly.
After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the fields of training, tax issues and financial ICT management, including mergers and acquisitions. She progressed to a position within South African Revenue Services before moving on to Anglo American Property Services, where she became group financial director with responsibility for ICT and payroll. Sharon joined Praxima Payroll Systems in 2001 and steered the company through the development of its own software. It is now a provider of payroll services to some of the largest legal practices in South Africa. She moved to Celergo to take up the role of head of operations UK. She was tasked with rightsizing its operations and refining the payroll processes to improve productivity. Sharon was asked to take on the COO role at Praxima Holdings in 2013 and has helped the company extend its footprint into Africa and beyond. She is a registered tax practitioner and member of CIPP and GPA.
