The new system will be fairer, encourage more family members to join medical schemes and scrap legal anomalies that discourage employers from providing off-site medical treatment to workers, the treasury says in its discussion paper.
Finance Minister Trevor Manuel first announced the changes in his February budget speech.
Instead of medical scheme members being allowed a deduction on two-thirds of their medical scheme membership fees, tax relief will be allowed on a capped contribution that takes into account how many beneficiaries there are.
The current tax dispensation means wealthy people get more tax relief for their medical expenses than the poor, a system treasury said was inherently unfair.
For example, an executive earning R800000 a year whose company pays his monthly fees of R5500 gets R17600 a year in tax relief while a worker earning R100 000 a year who gets R1300 in medical benefits gets tax relief of just R2600.
The treasury is also unhappy about the fact that people on very low salaries face tax bills for free medical treatment provided by their employers, because only two-third of these costs are tax deductible.
Treasury has proposed two alternative amendments to the Income Tax Act.
The first option limits tax- free contributions to R500 a month for the medical scheme member and their first beneficiary, and R300 a month for each of their other family members.
The second option caps the tax-free contribution at R300 a month for beneficiaries younger than 65, and at R500 for a beneficiary older than this. People who earn more than R400 000 a year would get a reduced tax subsidy under both options, it said.
The caps will be reviewed annually by the health department and the council for medical schemes, says the treasury.
Interested parties have until September 21 to comment before the treasury takes its final proposal to Parliament so changes to the Income Tax Act can be made in time for the laws planned implementation date of March 1 next year.
Industry sources were reluctant to comment at the weekend, saying they required more time to scrutinise the proposals.
Jonathan Broomberg, head of strategy and health policy at Discovery Health, said efforts to encourage more family members to join medical schemes was good news.
The treasury said its proposals would create an extra administration load, as more people earning less than R60000 having a year would have to file tax returns.