We all want to pay less tax – and there are several ways to accomplish this. Keeping meticulous tax records helps us keep track of expenses we want to claim later.
Seeking the advice of a tax professional can often improve our tax refund. Certain investments and charitable donations can help us reduce tax. Salary sacrificing is another tax-saving possibility.
But if you’re on a reasonably high income, one of the simplest ways to reduce your bill at tax time is to legally sidestep the government’s Medicare Levy Surcharge. This surcharge is imposed on Australians whose taxable incomes exceed a certain level, but who have chosen not to take out an appropriate level of private hospital cover.
This surcharge comes on top of the compulsory Medicare Levy paid by most Aussie taxpayers.
When we ponder the pluses of private health cover, we tend to think about things like shorter elective surgery waiting times, the ability to select our own physician for hospital procedures or the advantages of being looked after in a private ward.
What we can easily forget is how having private health insurance can also help us at tax time.
If your taxable income is less than $90,000 as a single or $180,000 as a family, you are not required to pay the Medicare Levy Surcharge.
Medicare Levy Surcharge: What is it and why do we have it?
The Australian Government introduced the Medicare Levy Surcharge to encourage more Aussies to take up private health insurance, with the goal of alleviating increasing pressures on the public system and Medicare.
The requirement to pay this surcharge is based on a tier system. If you have elected not to take out private hospital cover, you’ll find that the higher your taxable income, the higher your surcharge payment will be.
If your taxable income is less than $90,000 as a single or $180,000 as a family, you are not required to pay the Medicare Levy Surcharge. If your taxable income is $90,001 to $105,000 (single) or $180,001 to $210,000 as a family, the Surcharge is 1.0 per cent. A single taxable income of $105,001 to $140,000 or a family taxable income of $210,001 to $280,000 requires an MLS payment of 1.25 per cent.
And finally, if your taxable income exceeds $140,001 as a single or $280,001 as a family, your Medicare Levy Surcharge obligation is 1.5 per cent. (Note: the MedicareLevy Surcharge is indexed annually and the figures quoted above are applicable from 1 April 2017 to 31 March 2018).
Always consult the Australian Taxation Office for up to date information about the MLS.
If you have a spouse, your ‘combined taxable income for Medicare Levy Surcharge purposes’ is used to determine the amount of MLS you will have to pay. Income for MLS purposes includes your taxable income, reportable fringe benefits, reportable superannuation contributions and exempt foreign employment income.
If you have a spouse, income for MLS purposes also includes their share of net income of a taxable trust. The ATO website has full details on the precise parameters of ‘income for MLS purposes’.
You must pay the Medicare Levy Surcharge if you fall within the specified income thresholds and you or your family don’t have an ‘appropriate level of private patient hospital cover’. ‘Appropriate’ is defined as cover with an excess of $500 or less for singles and an excess of $1000 or less for couples and families.
This cover must be provided by a registered health insurer for treatment in an Australian hospital or day hospital and is paid directly to the insurer. It must cover all or some of the fees that apply to a stay in hospital.
One point worth noting is that if your family taxable income exceeds the threshold but your individual taxable income (for MLS purposes) is $20,896 or less, you’re not required to pay the MLS.
Extras cover, also known as general treatment or ancillary cover, is not the same as private hospital cover. This is a cover that can be purchased either on its own or in conjunction with hospital cover; it includes services like dental, chiropractic, optical, physiotherapy and other specialist treatments.
Unfortunately, having extras cover without hospital cover doesn’t exclude you from having to pay the Medicare Levy Surcharge.
How does the Medicare Levy Surcharge apply to families and dependents?
For the purposes of the Medicare Levy Surcharge, your dependents are defined as your spouse (regardless of their taxable income), children under the age of 21 and children 21 to 24 years of age who are full-time students. Dependents must be Australian residents and you must be contributing to their maintenance.
You’re considered a ‘member of a family’ during any period of the year in which you contributed to the maintenance of one or more dependents. If your children don’t reside with you but you’re paying child support, they are your dependents for MLS purposes.
In respect to the Medicare Levy Surcharge, your spouse is defined as a person (same sex or opposite sex) that you:
- were in a relationship with that was officially registered under a prescribed state or territory law, or:
- lived with on a genuine domestic basis in a couple relationship, even though you were not legally married
The ATO does not treat you as married if you live apart from your spouse, and doesn’t consider an ex-spouse that you’re paying maintenance to as a dependent.
If your domestic situation has recently changed and you’re not completely sure how these transitions affects your tax obligations in regard to the Medicare Levy Surcharge, contact the ATO for further clarification.
So how can this surcharge be avoided?
In order to get out of having to pay the Medicare Levy Surcharge, you must meet one of the following conditions:
If your taxable income is below the threshold for MLS purposes (less than $90,000/single or $180,000/family as of March 2016), you don’t have to pay the surcharge.
If your taxable income is over the income threshold but you’ve taken out hospital cover with a registered health fund for you as well as all your dependents, you needn’t pay the MLS. This cover must have a total yearly excess that’s less than $500 for singles or $1000 for couples and families.
If you’re normally exempt from paying the Medicare Levy because you’re a ‘prescribed person’ and you have no dependents (your taxable income isn’t considered in this case), you’re not required to pay the MLS.
If you’re a high-income earner who has already bought appropriate hospital patient cover (as defined by the ATO) on or before 24 May 2000, you’ll continue to be exempt from the MLS as long as you maintain continuous membership with the same hospital cover.
The word ‘continuous’ is important here: if you temporarily stop payments for your hospital cover (to take a trip abroad, for example), you’re not exempt from paying the MLS during that suspended period.
Of course, the Medicare Levy Surcharge isn’t the only financial aspect to consider when looking at private health cover.
There’s also the government’s private health insurance rebate (which contributes toward the cost of premiums) and LHC loading, which encourages younger Australians to buy and maintain hospital cover earlier in life.
The ATO can provide full details about how LHC loading and the rebate work – and there are plenty of online calculators to help you crunch the numbers.
Take a good look at what private health insurance can do for you
These days, budgets are tight. We want to do what’s best for our health but we expect our health care to be affordable, too.
Private health insurance can play a big part in helping us pay for both ongoing and unexpected medical costs.
Private health insurance can play a big part in helping us pay for both ongoing and unexpected medical costs. It gives us a lot more control over where we’re treated, who treats us and how long we have to wait for treatment.
It takes some of the strain away from the public hospital system and assists with services that may not be covered by Medicare.
Private health cover can also bring peace of mind. Even if you do all the right things – eat well, stay active and avoid unhealthy habits – illness and injury can still pay a visit. The future is not ours to see, as the song goes.
By planning ahead and finding a private health policy that matches up with your lifestyle and finances, you can take some of the uncertainty out of the equation.
Ultimately, it’s all about getting the best medical treatment possible when and if you need it.