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.

Keywords:

• gap cover
• medical expenditure
• medical scheme
• principles of taxation
• section 6B tax credit
• tax compliance

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The service provider Kaelo was previously known as KaleoXelus.

2 No records could be found of ABSA gap cover for 2020. The last ABSA gap cover plan options available were for 2019. The ABSA gold and silver gap cover series was also a product of Ambledown.

3 No records could be found of African Unity Health (AUH) gap cover for 2020. The last gap cover plan options available for AUH were in 2019. The AUH 2019 gap cover was a product of Kaelo.

4 No records could be found of the Care Range or who provided the product in the past.