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What is the Medicare Levy Surcharge?

4 min read

Australia’s tax system encourages high-income earners to take out private health insurance. It does this by charging a tax supplement (on top of the normal 2% Medicare levy) on high-income earners who don’t have private health cover. This is called the Medicare Levy Surcharge (MLS).

Who is liable to pay the surcharge?

If your income exceeds the relevant income threshold and you do not have an appropriate level of private patient hospital cover for the full year, you will be liable to pay the surcharge. The income threshold that the surcharge kicks-in at changes depending on whether you are single or have dependants:

 

Base Tier

Tier1

Tier2

Tier 3

Singles

$90,000 or less

$90,001-$105,000

$105,001-$140,000

$140,001 or more

Families

$180,000 or less

$180,001-$210,000

$210,001-$280,000

$280,001 or more

Medicare levy surcharge rate

0%

1%

1.25%

1.5%

For families, the income thresholds increase by $1,500 for each dependent child after the first.

How is the Medicare Levy Surcharge calculated?

There is a special definition of income for working out the Medicare Levy Surcharge. As well as your taxable income (such as income from your job, business or investments), other items are included such as reportable fringe benefits, reportable super contributions, and net investment losses. 

How to avoid the Medicare Levy Surcharge

In order to avoid the surcharge, you must have the appropriate level of cover. For singles, that means a policy with an excess of $500 or less. For couples or families, it means an excess of $1,000 or less.

Cover for ‘extras’, such as optical, dental, physiotherapy or chiropractic treatment, is not private patient hospital cover.  Buying cover for those items only will not exempt you from the surcharge.

Tax Tip: health cover extras

Beware health funds that try to sell you health cover plus extras to avoid the surcharge. The extras might be worth having from a health perspective but they won’t impact on the surcharge.

Tax Tip: avoiding the surcharge

Don’t be fooled by marketing material advising you take out health cover before 30 June to avoid the surcharge. The way the rules work, if your income exceeds the threshold and you don’t have appropriate private cover for the whole year, you’ll pay the Medicare levy surcharge up to the date you took out the policy. So, if you get near the end of the financial year and you don’t have health cover, it’s already too late to totally avoid the surcharge this year. You will get a tax saving through avoiding the surcharge but only for the days between taking out the cover and the end of the financial year (which could be minimal if you leave it until the end of the year). You will, of course, get a full tax benefit in the next financial year. If you don’t have cover yet, take it out as soon as possible in the tax year.

August 2016

 

Tax Laws How-to
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