Sickness has no respect of affluence and it befalls us all. At a given point in time, we may not all be in a position to cover the medical bills associated with such sickness and to guard against that some may decide to take medical insurance. Whenever one visits the doctor, a claim form is competed by the Health Service Provider for an onward refund by the medical insurer. Developments in the country however make the Health Service Providers having to wait for a long period spanning into more than 12 months in some cases. What is brought to the fore is the issue of when such long outstanding claims would be reported for income tax purposes. This is an issue of contention that needs to be ironed out to avoid situations whereby the taxpayer or the taxman tend to lose out on tax savings or tax revenue respectively due to ignorance or failure to understand the treatment of these medical claims. The purpose of the article therefore is to clarify the issue in respect of how medical claims are treated for income tax purposes.
At what point are claims recognised as income?
Income is brought to tax when it is received or when it accrues, whichever occurs first. In reference to the phrase “accrues” the law has stated that income accrues when a taxpayer becomes entitled to it. An accrual is distinguished from a receipt because it is based on a taxpayer becoming entitled to an amount. A medical service provider becomes entitled to payment upon performance of services or supply of goods and normally this is signified by an invoice which is an amount which is non-contestable. A non-contestable invoice is an invoice which is complete in respect of quantity supplied and the price of the supply and there are no conditions attached whatsoever as to the service provided and the amount to be charged. The fact that an amount is long outstanding or is paid in installments is not a condition precedent. Coming back to the definition of an invoice, an invoice is a document instructing the other party to make payment for goods or services supplied. It can therefore be argued that a medical aid claim form is an invoice. The medical fraternity provides for the AHFOZ rates on medical aid claims and these are well known within the medical fraternity. This means the conditions precedent are satisfied at the point of completing the claim. Hence the moment a claim is completed by the patient, the HSP becomes liable to pay tax on income accruing under the claim notwithstanding the money will be recovered from a medical aid society at a later date. The MDPCZ sets a tariff to be charged on any procedure performed by a medical and dental practitioner. If the tariff exceeds the amount set by the AFHOZ rates for a medical procedure the excess will be paid by the patient. This therefore buttresses the fact that a medical aid claim form suffices as an invoice for the payment of claims made by a medical service provider.
Tax in respect of waiver of right to receive payment
The fact that the taxpayer has waived the right to receive the payment or will receive the amount in instalments does not defer the tax point. In other words the condition of payment cannot postpone point of accrual. Watermeyer J in the case of Lategan whilst stressing this point had this to say “… He has not become entitled to a right to claim payment in the year of assessment, but he has acquired a right to claim payment of the debt in future. This right has vested in him, has accrued to him in the year of assessment, and it is a valuable right which he could turn into money if he wishes to do so”. This therefore means that, so long as the taxpayer becomes entitled to income, then the income has to be declared in the year of assessment. Any postponement of declaration of such income would be a violation of the tax laws. Health Service providers cannot avoid income tax on long outstanding claims. However, in the event that the claims become bad debts, these can be claimed as expenses to the extent that they are proved to the Commissioner to be irrecoverable. This is a contentious matter requiring a separate article.
HSPs are found in a fix to declare income for tax purposes and pay taxes on amounts not yet received, on the basis of their accrual. In the event that the HSP omits the income in his/her return and the error is picked by ZIMRA he/she may face stiff penalty measures. The revenue authority may raise an assessment in terms of the law for the understated income and request the HSP to settle the understated tax plus additional tax of 100% and interest at 10% per annum on the understated tax. The HSP should therefore take into account outstanding claims in their returns to avoid the penalties. If you do not have the money to pay you should agree on a payment plan with ZIMRA to avoid the penal measures.