Tax Questions: Can medical expenses give rise to an assessed loss?
Is it possible for an individual taxpayer to incur a tax loss which can be carried forward to the next tax year? As an 68 year old, I have had large medical expenses in the last tax year
Section 18 governs the deductibility of medical expenditure. While the list of qualifying medical expenditure is fairly extensive and beyond the scope of this reply, suffice to say that, for the purposes of your question, taxpayers that are 65 years of age or older at the end of the tax year in question may deduct all qualifying medical expenses in full (i.e. such taxpayers are not subject to the rule that only the amount exceeding 7.5% of taxable income is claimable).
Interestingly enough, Section 18 does not contain any proviso concerning cases where qualifying medical expenses exceed taxable income in a particular year of assessment, nor have I been able to locate any other Section that limits such expenses to taxable income. Theoretically, you should therefore be able to carry over a tax loss to the following year of assessment.
I'm not sure however how the 7.5% rule would impact the claim in Year 2 - for example, supposing that your qualifying medical expenses (after deduction of 7.5% of taxable income) resulted in a tax loss of R50 000 for the 2010 tax year, and such loss is carried over to 2011. When you complete your 2011 return, would you be required to add the R50 000 loss to your 2011 medical expenditure, and then deduct 7.5% of your 2011 income in order to calculate the qualifying medical deduction? On the face of it, this would seem like "double jeopardy" by taking the 7.5% of the R50 000 loss as well, but since I haven't come across such a situation in practice (or in any literature, for that matter), it would be interesting to see how SARS would treat this in practice. Might make for an interesting court case! Thankfully this problem will not crop up in your case, since you are over the age of 65 and can therefore deduct your medical expenses in full.
However, note that Section 8(4)(a) contains a provision whereby in the case of any expenditure that has been claimed as a tax deduction, recovery of any amount relating to such claim from a third party must be treated as a taxable recoupment. Simply put, this means that if you have incurred medical expenses of R100 000, but your medical scheme or a medical insurance has reimbursed you R70 000 thereof, your claim will be limited to R30 000. In other words, you can only claim the amount that represents your out-of-pocket expenses.
This provision also applies if you have incurred the expenses, but your spouse (as principal member of the medical scheme) has received the recovery (Section 18(1)(b, c, and d). The term "spouse" has wide application as far as tax law is concerned, since the definition of "spouse" includes "in relation to any person, means a person who is the partner of such person-
a) in a marriage or customary union recognised in terms of the laws of the Republic;
b) in a union recognised as a marriage in accordance with the tenets of any religion; or
c) in a same-sex or heterosexual union which the Commissioner is satisfied is intended to be permanent,
and 'married', 'husband' or 'wife' shall be construed accordingly: Provided that a marriage or union contemplated in paragraph (b) or (c) shall, in the absence of proof to the contrary, be deemed to be a marriage or union without community of property" (Section 1, definition of "spouse").