What is the Medicare Levy Surcharge
What’s less exciting than talking tax? Talking insurance, right?
But did you know that taking out private hospital insurance can possibly save you money twice come tax time?
We all pay a Medicare Levy as part of our tax. That’s our contribution to a public health system that provides discounted and even free essential health services to us as Australians. But many of us also paying a Medicare Levy Surcharge (MLS). While the Medicare Levy is a tax we all pay (with some exceptions, of course), the MLS is an additional surcharge you may not have to pay. And it could be as simple as taking out private health insurance.
Let’s explore the difference in these two taxes, and how you can avoid the second one by taking care of your health. Firstly, let’s look at what the Medicare Levy and the Medicare Levy Surcharge are, and how they differ from each other.
What is the difference between the Medicare levy and Medicare Levy Surcharge?
What is the Medicare Levy?
All Australian residents have access to Australia’s public healthcare system, known as Medicare. To cover some of the costs of Medicare, 2% of your taxable income is levied each year through the Medicare Levy. This is in addition to the standard tax you pay and is usually taken as part of the Pay as You Go (PAYG) amount withheld from each pay by your employer. When you complete your tax return, this figure is then confirmed to ensure you have paid the correct Medicare Levy amount for that financial year.
What is the Medicare levy surcharge and why do you need to pay it?
The Australian government implemented the Medicare Levy Surcharge (MLS) to take financial strain off the public health services by providing incentives for higher earners to purchase private health insurance. The MLS is an additional percentage, taxed on top of the Medicare Levy, payable by each person who does not have appropriate private health cover and earns more than $90,000 income in a financial year. The MLS thresholds require an additional 1% – 1.5% tax on income, depending on your earnings over $90,000. It is payable for every day that you do not hold private health insurance for the year in which you have earned $90,001 or more.
What is the difference between the Medicare Levy and the Medicare Levy Surcharge?
The clearest difference between the two Medicare taxes is that the Medicare Levy is payable by almost everyone who earns taxable income, while the MLS is only payable by those in higher-earning income tax brackets. In addition, eligibility for exemption from the MLS relies on higher earners purchasing an appropriate private health insurance policy, whereas having private health insurance has no impact on the amount of Medicare Levy paid.
Let’s break that down a bit further.
Who Pays the Medicare Levy?
Almost everyone who works in Australia and earns a taxable income pays the Medicare Levy, so the better question may be “who doesn’t pay the Medicare Levy?” There are two main groups who pay either zero or reduced Medicare Levy.
1. Low Income Earners
There are exceptions to the Levy for low-income earners. For single people who earn:
- taxable income between $22,802 and $28,501 a Medicare Levy Reduction is applied to the levy rate
- taxable income of $22,801 or less no Medicare Levy is paid
If your income is over these threshold amounts but based on your family income, you may still qualify for a reduced Medicare levy if your combined income is $48,092 or less (plus $4,416 per dependent child) and:
- had a spouse (married or de facto or
- are entitled to an invalid carer tax offset or
- had sole care of at least one dependent child
For those entitled to the seniors and pensioners tax offset, these taxable income amounts are slightly higher. For more information on the Seniors and Pensioners Tax Offset contact your specialist, today.
2. Medicare Entitlement Statement Holders
If you hold a Medicare Entitlement Statement you are also eligible for Medicare Levy exemption. This statement, provided by the Department of Human Services, is issued to:
- temporary visa holders who have not applied for permanent residency
- temporary visa holders who are not eligible for Medicare services under a Reciprocal Health Care Agreement
- New Zealand residents who, in the past twelve months, have spent less than six months in Australia
- Australian citizens who have lived overseas for five years or more
- Australian permanent residents who have lived outside Australia for 12months or more
This statement entitles you to full exemption from the Medicare Levy, however you must:
- have the Medicare Entitlement Statement prior to completing your tax and
- complete section M2 – Medicare Levy Exemption on your tax return
Who Pays the Medicare Levy Surcharge?
The Medicare Levy Surcharge is payable by anyone working in Australia and earning taxable income of more than $90,000 for single and $180,000 for couples or families. The only exclusion to this is those whose combined income is more $180,000 but whose individual taxable income was $22, 389 or less.
What are the Medicare Levy Surcharge thresholds?
The Medicare Levy Thresholds are tiers created to determine what percentage you are required to contribute to the MLS, based on your taxable income for the financial year. These tiers are calculated for both singles and couples or families. For families with more than one dependent child, these thresholds increase by an additional $1,500 per dependent child after the first. The table below shows the thresholds and surcharge percentage for each tier.
How do I avoid the Medicare Levy Surcharge?
Simply put, take out a valid private health insurance policy.
The most important thing is to ensure that the cover you choose is valid. The easiest way to ensure appropriate cover is to choose cover:
- from a registered provider
- that includes private patient hospital cover which has an excess of $750 or less (for singles) or $1,500 or less (for couples or families)
While you may also choose to take out general or extras cover, you should be aware that this type of cover alone does not count as appropriate private insurance. To avoid the MLS your cover must include the hospital cover element within the policy.
What are the exemptions for the Medicare Levy Surcharge?
As with the Medicare Levy, there are various people who may be exempt from the Medicare Levy Surcharge for reasons not related to their income or level of private insurance. You may be exempt for all or part of the year if you:
- are not entitled to Medicare benefits
- are a foreign resident for tax purposes
- are a blind pensioner
- have received sickness allowance from Centrelink
- have or can claim medical treatment through Defence Force arrangements or on a Veterans’ Affairs Repatriation Health Card
What is considered income when it comes to the Medicare Levy Surcharge?
The ATO has a specific definition for income when it comes to MLS, called Income for MLS Purposes. To calculate your income correctly, you should include:
- your taxable income including any share of family trust incomes
- your spouse’s income and share of family trust income (if you have one)
- reportable fringe benefits
- total net investment losses
- all reportable super contributions
- any exempt foreign employment income
The ATO has created an income tests calculator, to make calculating your income for MLS purposes easier. You can also speak with your trust Willmot Accounting tax professional for further help.
Why should I take out private hospital cover?
Outside of the reduction in your tax by removing your requirement to pay the MLS, there are other benefits to taking out private hospital cover.
An additional financial benefit of having private hospital cover, is government contributions to your private health insurance, offered in the form of a tax rebate. While this rebate is income tested, meaning a higher income will result in a lower rebate, it helps you recover a percentage of the cost outlaid for private health cover. Your rebate can be claimed one of two ways:
- directly through your private health insurer, as a rebate on the cost of your private hospital cover
- as a refundable tax offset as part of your tax return
If you’d like to know more about the rebates available, refer to the Australian Tax Office’s (ATO) Private Health Insurance Calculator to calculate your MLS and rebate for the current financial year.
There are also obvious health benefits to taking our private health insurance. These benefits include access to both private and public hospitals for surgery and treatment, and choice of doctor. You will also have more choice over when you are admitted for procedures and find waiting lists within the private system vastly shorter on average.
If you choose to take out general or extras cover, or a more premium policy, you may also be eligible for rebates on additional health services, such as dental, physiotherapy, psychology, and optical care. Additionally, many private health insurers also over member discounts on health and lifestyle products such as gym memberships, sporting goods, and activities. Be sure to know what yours entitles you, to get the most out of your membership.
Are you from a country with reciprocal healthcare agreement with Australia and earning about the threshold of $90,001? By purchasing private hospital cover, you can also avoid the MLS on your income. However, this may only be of benefit for tax purposes as using your private cover will likely result in much higher costs and limited benefits for you as a non-Australian resident. You may find your reciprocal benefits or Overseas Visitors Health Care to be better options financially, when requiring hospital care.
It is worth noting that in many circumstances having private hospital cover may not prove beneficial for tax purposes. If your income falls below all three MLS thresholds, or a private policy will end up costing you more per year than the percentage in MLS you will likely pay, it may not be beneficial to add the cost of private cover to your yearly expenses. As with all financial decisions, speaking with a professional and understanding the impact to your finances is key.
Additionally, when it comes to purchasing private cover, always shop around for the best policy for you and your family and remember to include hospital cover to remove your MLS. As with all insurance products, be sure to read and understand all terms and conditions of the policy.
Does having private health insurance reduce Medicare Levy?
How does Medicare Levy Surcharge work?
The MLS is calculated based on the income threshold you fit within for that financial year. A percentage of 1%-1.5% is added to the total amount levied from your income.
For example, if you fall within the first tier, and your income is $100,000 you will have an MLS payable of $1,000 (1%), on top of the Medicare Levy payable of 2% or $2,000, bringing your total Medicare Levy to $3,000.
You can avoid paying the MLS by taking out private hospital insurance with a registered provider for the full financial year. While you will still be required to pay the Medicare Levy of $2,000, by opting for private hospital cover you remove the 1% surcharge levied against you as a higher income earner. Additionally, you may be entitled to a percentage rebate in your private health insurance.
Does everyone need to pay the Medicare Levy Surcharge?
No. Only those who earn equal to or more than the lowest threshold amount of $90,001 for singles or $180,001 for couples or families are required to pay the MLS. However, those who purchase appropriate private health insurance or those with exemptions are also able to avoid paying the MLS.
Do you need to have a private hospital cover for the whole financial year?
Yes, you must have private hospital cover for the whole financial year to avoid the MLS. If you only have private hospital cover or are exempt from the MLS for part of the financial year, your MLS will be calculated based on the number of days you were not covered by private health care or held an exemption.
Does everyone in your family need private hospital cover?
Yes, you must take out private cover for yourself, your partner, and all dependents under then age of 21 to ensure you avoid the MLS. If your partner or any dependent under the age of 21 is not covered, you will pay the MLS.
Children over 21 who are not a full-time student are not considered dependents and do not need to be covered as part of your private hospital cover to avoid the MLS. This is important as, anyone over 21 on your policy who is not considered dependent may be required to pay the MLS in their own tax return if they earn an income greater than $90,000 and do not have their own private health cover.
While both the Medicare Levy and the MLS serve to support our public health system, both are very different in their implementation in our tax system. While not a solution for everyone, for those with higher incomes who can afford and benefit from private health insurance, the MLS becomes a way to reduce your tax while also opening up better health benefits for yourself, and the Australian public as a whole.
If you have more questions about the Medicare Levy or MLS, visit the ATO website, PrivateHealth.gov.au, or speak to one of Willmot Accounting’s tax specialists for advice on your personal circumstances.