Tax time can be a stressful time of the year for many Australians. There’s that panic-stricken hunt for old receipts and financial statements, and all the doubt about what you can claim for when it comes to work expenses.
Should you complete your own tax return online or get a registered tax accountant to do the job for you?
What happens if you’re audited?
If you’re likely to owe the ATO money this financial year, have you put enough aside to cover it?
There are so many questions – and a firm deadline on when you need to come up with answers.
Whether you complete your tax return yourself or have a professional do it, the more you know about how tax works, the more money you could save when it’s time to lodge. One area where it definitely pays to understand all the implications is private health insurance.
When people weigh up the advantages of having private health cover, they tend to think about things like shorter waiting times for elective surgery, being able to choose their own doctor or the pluses of being looked after in a private ward.
What they often forget is that having private health insurance can be beneficial when it’s time to lodge their tax return at the end of the financial year.
Here are some things to consider when looking at health insurance and saving on tax expenses.
What the Medical Levy Surcharge (MLS) means to you
The purpose of the Medicare Levy Surcharge is to encourage Australians to buy private health insurance and thereby reduce the growing burden on Medicare and the public system. This is an additional surcharge that’s levied against taxpayers who earn above a certain income level and have opted not to take out private health cover.
Don’t confuse the Medicare Levy with the Medical Levy Surcharge – these are two distinctly separate things. The Medicare Levy is the levy that most Australians pay as a normal contribution to the ongoing costs of our public health system.
The Medicare Levy is the tax that most Australians pay as a normal contribution to the ongoing costs of our public health system.
It’s normally 2 per cent of taxable income, though there are reductions for certain low-income earners and exemptions for others who fall into specific categories.
The Medicare Levy Surcharge is an additional surcharge that only has to be payed by those who earn over a certain amount and don’t have private hospital insurance.
Income thresholds for this surcharge are indexed once a year. Depending on how much you earn, the MLS is charged at a rate of between 1 per cent and 1.5 per cent of your annual income. If you have a spouse, the surcharge is based on your combined incomes.
The Medicare Levy Surcharge is calculated based on a tier system: the more you earn (without having private health insurance), the higher your surcharge amount is going to be.
The figures below are applicable from 1 April 2018-31 March 2019:
- Taxable income less than $90,000 (single) or $180,000 (family) – no MLS payable
- Taxabale income $90,001 to $105,000 (single) or $180,001 to $210,000 (family) – your MLS is 1.0 per cent
- Taxable income $105,001 to $140,000 (single) or $210,001 to $280,000 (family) – your MLS is 1.25 per cent
- Taxable income more than $140,001 (single) or $280,001 (family) – your MLS is 1.5 per cent
The term ‘family’, as it applies to the MLS, includes couples, de facto couples and single parents. Because payment thresholds can change from year to year, always check with the ATO for the latest information.
The Australian government applies the Medicare Levy Surcharge that matches your ‘income for MLS purposes’ and this appears on your tax assessment in conjunction with your Medicare Levy payment as one amount.
If you fall into one of the surcharge categories, you can avoid paying the surcharge by taking out an ‘appropriate level of private patient hospital cover.
For singles, this is defined as having an excess of $500 or less and for families/couples, an excess of $1000 or less. Generally speaking, basic hospital cover is sufficient to meet these criteria.
Keep in mind that private hospital cover is completely different to extras cover (which provides for dental, physiotherapy, optical, chiropractic and other specialist treatment) and does not exempt you from paying the MLS. Private hospital cover can be bought with or without extras cover – and some insurers may provide a discount if you purchase both together.
If your family taxable income is greater than the $180,000 threshold but your personal income (for MLS purposes) is $20,896 or less, you are not required to pay the Medicare Levy Surcharge.
So the bottom line is this: if you earn over a certain amount but for whatever reason choose not to take out private hospital cover, the government is going to hit you up for a Medicare Levy Surcharge.
Let’s say, for example, that you’re a single person who has a taxable income of $110,000 a year and you have no private hospital cover. That puts you in the threshold category for a Medicare Levy Surcharge of 1.25 per cent. 1.25 per cent of $110,000 is $1375.
So you’ll have to pay this on top of your normal Medicare Levy. It can sure add up. Use this Medicare Levy Surcharge calculator from ATO to find out how much extra you could be paying without private health insurance.
Further incentive – the Australian Government Private Health Insurance Rebate
The Medicare Levy Surcharge isn’t the only way the government is trying to encourage people to take out private health insurance. They also provide an income-tested rebate to help private health fund policy-holders with the cost of premiums.
The tiered income thresholds for this rebate are the same as the MLS, but rates vary depending on your age as well (less than 65, aged 65 to 69 or over the age of 70). If you meet the eligibility requirements, you can either have the rebate deducted from your premiums or claim it back when you complete your annual tax return.
One very important point: if you are subject to Lifetime Health Cover loading (LHC), the Australian Government Private Health Insurance Rebate does not apply to the LHC loading portion of your premium.
The government rebate applies to private health policies for hospital cover, extras (general treatment) cover and ambulance services but not to overseas visitor cover.
The Australian Tax Office has a handy online Private Health Insurance Rebate Calculator to help you work out your entitlement to a rebate and the percentage you can claim.
It even tells you the Medicare Levy Surcharge amount you would have been charged if you didn’t have private health cover.
How Lifetime Health Cover loading affects your yearly tax bill
In July 2000 the Australian government introduced Lifetime Health Cover, an initiative that encourages Aussies to take out hospital insurance cover at a younger age – and to maintain it over a longer period of time.
Essentially, it recognises how long you’ve already had private health insurance and rewards you for that loyalty by offering reduced premiums. So if you purchase private hospital cover before you turn 31 and keep it, you’ll avoid teh Lifetime Health Cover loading.
Lifetime Health Cover (LHC) loading applies to hospital cover only – not extras cover. It is paid on top of your existing hospital cover premium at a rate of 2 per cent for each year that you’re aged over 30 when you purchase the cover.
For example, let’s say you wait until you’re 42 to take out private health insurance. That’s 2 per cent loading for twelve years, which means you’ll be up for 24 per cent more LHC loading than a person who took out (and maintained) private health cover at the age of 30.
The maximum LHC loading possible is 70 per cent (ouch!). The good news is that once you have held private hospital cover (and paid the loading) for ten continuous years, the LHC loading is removed.
If you want to save a heap of money and avoid paying the extra LHC loading on your private health insurance, take up the cover before you turn 31.
And once you do get private health cover, remember to keep those payments going without interruption for ten or more years.
LHC loading is something you simply can’t afford to forget about as you approach your thirties. If you need more information about LHC, the government’s FAQs page should answer any questions you might have about how it all works.
Other simple ways to pay less tax each year
Having private health insurance is just one of many ways you could trim your yearly bill at tax time. Here are some other proven methods:
Donate to registered charities
When you give money to registered charities in any amount over $2, that donation is tax deductable. As long as you get receipts from any charities you donate to, you can claim them as a deduction at tax time.
Your donations are subtracted from your taxable income and you receive a percentage back.
When you give money to registered charities in any amount over $2, that donation is tax deductable.
Note that buying a ticket in a lottery operated by a charity is not considered a donation and is therefore not tax deductible.
Be more fastidious about claiming deductions
One of the easiest ways to reduce your tax bill is to know exactly what work-related expenses you can claim for . These might include transportation costs, uniforms, home office deductions, travel expenses for conferences or meetings, etc.
If you spend any money during the financial year that’s related to your employment, always get receipts for expenditures, keep them in a safe place and see if you can claim for them at tax time.
If the expense is part personal and part work-related, you may still be able to deduct the work portion.
Every expense can potentially add to your deduction total – even those $4 postal receipts!
Don’t DIY – use a tax professional
Accountants and other tax experts know lots of things about the mysteries of tax that you probably don’t. They can uncover deductions you never knew existed.
They can fix up errors that might slow down your refund – or worse, cause you to be audited.
No, they’re not free, but the amount of money (and headaches) they can save you might be substantial. Having a registered tax agent complete your return can also reduce your risk of having problems with the ATO.
Keep tax records like a pro
What’s the best way to make sure you’re able to claim for everything you’re entitled to? That’s easy: keep meticulous records. When the time comes, you should be able to locate all your receipts, credit card statements, bank records, GST details, previous year’s tax records and logbooks in an instant.
With the government doing all they can to encourage the take-up of private health insurance across Australia, there’s one more money-saving tip to keep in mind: ensure you get the private health insurance that suits your needs.
Keep a folder, an expanding file or a box for your paperwork and ensure any electronically-stored information is on at least one USB stick.
There are plenty of mobile apps around these days for tax record-keeping, many using your smartphone camera for backup photo storage of receipts (it’s still a good idea to hang onto the original paper copies too).
Shop around for private health insurance
With the government doing all they can to encourage the take-up of private health insurance across Australia, ensure you get the private health insurance that suits your needs. Many insurers have different levels of hospital cover and handy comparison tables to help you select the most appropriate policy for your changing lifestyle.