With Budget 2018 just days away, National Health Insurance (NHI) is a big concern for at least the eight million people in South Africa who rely on medical tax credits to subsidise the cost of existing medical aid schemes. 

NHI – where it stands

NHI was first proposed in 2011. The objectives include providing improved access to quality health services for all South Africans, employed or unemployed, and to pool risks so that equity and social solidarity are achieved through a single fund.  It is anticipated that NHI will be implemented in 2025.  In the interim, the design of NHI needs to be finalised and the extra costs of between ZAR 75 billion and ZAR 108 billion per year must be funded.

Will medical tax credits be removed?

When the revised White Paper on the NHI was released in July 2017, Health Minister Aaron Motsoaledi expressed the view that medical tax credits are “unfair” and should be removed.  This was met with public outcry.  A report by Econex found that without the medical tax credit, the poorest 1.9 million medical aid members would be forced out of medical funds because of the prohibitive cost. 

However, in the Medium Term Budget Policy Statement of 25 October 2017, Finance Minister Malusi Gigaba again noted that Government is considering changes to the design, targeting and value of the medical tax credit as part of the policy development process for the 2018 Budget.   

National Treasury indicated that it would seek input from the Davis Tax Committee on the feasibility of proposals to adjust the medical tax credit to fund the NHI.  The final Davis Tax Committee report on NHI, published on
13 November 2017, was clear that, “the phasing-out of the medical tax credits can only happen once the NHI is fully operational. In addition, the needs of people with disabilities and the aged and the financial implications for such taxpayers would require special attention.”

Huge personal tax increases to fund NHI?

The revised White Paper on the NHI included funding proposals.  Five tax scenarios were identified:

• Scenario A: The introduction of a 1% payroll tax, a 1% surcharge on taxable income and a 1% increase in the VAT rate
• Scenario B: A combination of a 2% payroll tax and a 2% surcharge on taxable income
• Scenario C: A 2% surcharge on taxable income with a 1.5% increase in VAT
• Scenario D: A 2% payroll tax with a 1.5% increase in VAT
• Scenario E: A 4% surcharge on taxable income alone

Scenario B has been highlighted as the “most preferred option” for revenue generation, being a 2% payroll tax on employers and an extra 2% tax on individuals. In practice, employer costs are typically factored into the ‘total cost to company’ of employment, and then economically borne by the employee.  For existing employment relationships, it could be anticipated that employee increases would be lower to compensate for the extra tax.  Economically, the effective personal income tax rates would shift by 4%. 

High-income individuals are still reeling from the 4% tax increase in 2017. NHI would mean a further effective 4% tax increase.  This is without taking into account the tax increases being recommended to fund free tertiary education or address the current tax deficits.  Each recommendation appears to be made in isolation, and the tax pain accumulates. 

However, the final Davis Tax Committee report on NHI suggests that the funding proposed in the White Paper is inadequate, and that the personal income tax surcharge would need to be in excess of 6%, not 4%.  In the circumstances, there is much apprehension around Budget 2018 and NHI announcements.

NHI – way forward

According to the NHI Impact Assessment document, 2017/18 to 2020/21 is the second phase of NHI implementation.  This phase will focus on the development of the NHI legislation, amendments to other, existing legislation, and the establishment of the NHI Fund.  The third phase, in 20212/2 to 2025/26, is where NHI-specific taxpayers are supposed to be introduced. 

However, there are concerns around premature withdrawal of medical tax credits, and the nature of proposals of heavy future tax changes on already burdened individual taxpayers.  As highlighted by the Davis Tax Committee, adequate engagement is essential to prevent later resistance during implementation, as happened with the e-toll situation.   

Article by Lebo Motsumi, associate in our Tax Practice.