IN 121: Deduction of medical lump-sum payments

SARS has published Interpretation Note (“IN”) 121 which explains the application of section 12M of the Income Tax Act 58 of 1962 (“IT Act”) which relates to the deductibility of a lump-sum amount paid by a taxpayer to or in respect of a former employee or their dependents for purposes of covering post-retirement medical benefits.

Previously the tax treatment of a lump sum paid by a taxpayer to cancel the obligation to provide for the post-retirement medical benefits of a former employee was uncertain and arguably not deductible. Since the introduction of section 12M, a taxpayer can claim an immediate deduction of a lump-sum payment made for purposes of covering the post-retirement medical aid contributions of a specified former employee or dependent if it meets the requirements.

Section 12M provides for a deduction if –

• an amount is paid by the taxpayer ;
• by way of a lump sum ;
• during the taxpayer’s year of assessment;
• in the course of the taxpayer’s trade;

to –

• any former employee who retired from the taxpayer’s employment on the grounds of old age, ill-health or infirmity or to any dependent of such former employee, or
• an insurer under a policy of insurance taken out solely in respect of one or more of the above-mentioned former employees or their dependents; and
• to the extent it is paid for the purpose of making any contribution to a medical scheme or a medical fund in respect of such former employee or his or her dependents.

No deduction is allowed if the taxpayer or any connected person in relation to the taxpayer retains or has a future obligation as relates to the mortality risk of the above-mentioned former employee or dependent.

Section 23(e), dealing with income carried to a reserve fund or capitalized in any way, does not prohibit a deduction under section 12M.

IN 121 can be accessed here.

01/07/2022