Tax relief on medical expenses

Access to healthcare is provided for as a right in terms of our law and there are different ways this right can be realised. Employees incur medical costs which are resultantly strenuous on their income which has already been reduced by other various taxes thus prejudicing them from accessing healthcare services. This burden can also be lessened contributions made by the employer. To reduce the cost to employees and employers, the government has provided tax incentives on medical expenses and medical contributions as a progressive measure in the realisation of the right of access to health care as enshrined in the Constitution of Zimbabwe. Healthcare costs are incurred by everyone at some point in their lives hence the tax incentives reduce costs of receiving healthcare services. These tax incentives come in the form of tax exemptions, credits and deductions. Tax credits and exemptions are granted to employees, whilst tax deductions are granted to employers as fully explained below. There are two main classes of medical costs namely medical expenses (cost of drugs, treatment and invalid appliances) and medical contributions which are the focus of this article.  

Medical expenses that are recognised by the fiscus are comprised of hospitalization cost, treatment costs, drugs and expenditure on invalid appliances.  Cost of invalid appliance covers expenditure on purchase, hire, repair, modification or maintenance of an invalid appliance or fitting which are for use by a taxpayer or his spouse or any child by reason of his or her mental or physical defect or disability.  Where the employer has paid for these costs on behalf of the employee, he/she obtains a tax deduction in the computation of its income. To the employee, the amount paid by the employer represent a fringe benefit however the law exempts from tax this benefit in the hands of the employee. On the other hand, an employee gets 50% tax credit in respect of medical expenses incurred by him/her for himself or herself, his/her spouse or child. Only expenditure paid in respect of prescribed drugs qualify for the tax credit. The employee should forward the original invoice of the incurred expenditure, which has not been recovered from any source to the employer to facilitate the claiming of the credit. The bill will be entered in the payroll and the employee’s payable tax will be reduced by 50% of that bill.

Turning to medical contributions. These can be made by the employer on behalf of the employee, or the employee can contribute or pay for them out of his/her own funds.  Medical contributions are defined as payments made to various medical aid societies to cover medical expenses of employees or their close relatives and dependents. When an employer makes medical contributions for its employees, the benefit gained by the employee is exempted from PAYE. These expenses are deductible to the employer when computing income tax on profits. Where the medical contributions are paid to an unapproved medical aid society the employee will be taxed on the benefit and the employer would not be granted the deduction in respect of those medical contributions. The law requires medical aid societies to be approved annually by the Commissioner for both employer and employee to have the fiscal benefits as aforesaid. This makes contributions made to unapproved funds such as in-house medical schemes or foreign medical aid society not qualifying for tax credit and non-deductible. The Commissioner approves a medical aid society or scheme if he is satisfied that it is a permanent society or a scheme established for the purpose of providing benefits for its members and their dependents in respect of expenditure incurred on medical, dental or optical treatment, including treatment prescribed by a medical or dental practitioner, the provision of drugs for medical, dental or optical purposes, the provision of medical, surgical, dental or optical appliances or the provision of ambulance services.

Medical contributions made by an employee using his own funds qualify for 50% tax credit provided they consist of contributions made to an approved medical aid society. Non-residents are disqualified from claiming medical expenses, except medical contributions made to a medical aid society. Where the taxpayer is deceased and the estate has made any payment of medical expenses those expenses should be claimed in the person’s pre-death period of assessment.

In a nutshell, tax incentives on medical costs of employees is a way of promoting employees’ access to healthcare by the government. Both employers and employees are urged to take advantage of these incentives. They should fully understand the tax implications of the medical costs thereof as this enable them to minimise their respective tax bills and structure the remuneration efficiently, which may result in increased productivity.