I was completing a tax return last week for a client. They asked a question about what extra tax they would need to pay if they decided to get rid of their private health insurance.
Now first up, let me say that I’m not going to give anyone advice about whether their policy is the right one for them or even whether they get value for money from their policy. But I did attempt to explain the tax implication of not having private health insurance.
It made me realise how complicated the Medicare levy is and how ridiculously difficult it is to give a straight answer to a really simple question.
There are three parts to the Medicare puzzle.
Firstly, the Medicare Levy. The Medicare Levy is set at 2% of taxable income and enables all residents of Australia to access health care. In 2017/18, If you are a single individual and your income is below $21,980. There is a reduced rate up to $27,475 and after this, you will pay the full 2% on all taxable income.
If you are eligible for the Seniors and Pensioners Tax Offset, in 2017/18 you could earn up to $34,758 before paying Medicare Levy.
If you are a non-resident you do not pay the Medicare Levy (because you also aren’t entitled to access the health care system).
There are also some exemptions and reductions for eligible Veterans and their spouses.
Next is the Medicare Levy Surcharge (MLS). This is an additional amount which you will pay if you don’t hold private health insurance. If you hold private health insurance, you will not pay MLS regardless of your income.
If you are not in a health fund, and your income exceeds the thresholds, you will pay MLS on your adjusted taxable income. The MLS to be paid increases as income increases. The following are the scales up to the end of the 2020/21 financial year:
| Rate of surcharge | Single | Family |
| 0% | $0 – $90,000 | $0 – $180,000 |
| 1% | $90,001 – $105,000 | $180,001 – $210,000 |
| 1.25% | $105,001 – $140,000 | $210,001 – $280,000 |
| 1.5% | $140,001 + | $280,001 + |
If you are a single parent, you pay the family rate. The family thresholds are increased for each dependent child.
Remember, if you join a health fund part way through the year, you will continue to be liable for the MLS for the period that you weren’t a member of the fund.
The other complicating factor, is that MLS is payable on adjusted taxable income. This is equal to taxable income + reportable fringe benefits + investment losses + reportable superannuation contributions.
The final piece of the puzzle is the Private Health Insurance Rebate (PHIR). The PHIR was originally introduced to encourage everyone to take out private health insurance. It was a rebate of 30% on the cost of the policy and was generally received in the form of reduced premiums. In 2010 the system was changed and entitlement to the PHIR was covered by a means test. The thresholds are scaled in a similar way to the MLS. As you go over certain thresholds, your entitlement to the PHIR is reduced until it is reduced to Nil. In addition, the amount of rebate which is paid is adjusted each year in April according to an average in the Consumer Price Index for the year. As you can see, it’s really complicated! That’s why the Tax Office have developed a calculator so that you can estimate the amount of PHIR that you are eligible to receive.
To simplify, if at 1 July 2018, if you were a single and your adjusted taxable income was less than $90,000 you will be eligible to receive a rebate of 26.791% of your health insurance premiums.
You are able to claim this directly from your health insurance provider by paying less for your premium. Alternatively, if you don’t pay reduced premiums, you will receive the rebate when you complete your tax return. If you have received more PHIR because you are paying reduced premiums and your income is higher than you anticipated, you will need to repay the rebate when you compete your tax return.
This situation occurs frequently and is the most common reason people have a nasty unexpected tax bill when they lodge their return. It can be avoided in the future year by contacting your private health insurance provider and asking them to reduce the rebate you are receiving (that is increase the amount you are paying).
So, as you can see, a simple question of “can I reduce my tax bill if I join a health fund” becomes very complicated. If you need help with sorting through the Medicare Levy maze, I offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your finances!