The taxation of gap cover policies for individual taxpayers in South Africa: a critical analysis

Abstract

Gap cover policies cover the shortfall between medical scheme benefits and the rates the service providers charge and are therefore used by individuals in South Africa to supplement payments of medical expenditure not covered by private medical schemes. Little information is available about the tax consequences of gap cover. The objective of this study is to provide a critical analysis of the issues in the normal tax treatment of gap cover for individual taxpayers in South Africa, and to make recommendations to the South African Revenue Service to mitigate these issues or practical problems. A non-empirical study based on existing literature was performed which includes a critical evaluation and analysis of gap cover policies and existing tax legislation. It is found that gap cover refunds should be subtracted from the qualifying medical expenditure used in the medical tax credit under section 6B of the Income Tax Act No. 58 of 1962. Various factors may lead to incorrect information being reported on the income tax return, this may lead to a section 6B tax credit to which the taxpayer is not entitled, or which is in excess of what the taxpayer is entitled to. It is found that gap cover contributions are not deductible and that not allowing gap cover contributions as a deduction or as a tax credit detracts from the principles of taxation.