The Medicare Levy Surcharge is an extra charge levied on Australian taxpayers who do not own a proper level of private health insurance and who earn more than a certain income threshold. The intention behind Medicare Levy Surcharge, or MLS, was to reduce demand on the public Medicare system by encouraging people who earn above $90,000 (or a couple over $180,000) to use private health covers. This means that if your annual income is less than $90,000, you don’t have to pay any MLS. Then, how can you calculate your income?
Income for MLS Purpose
This section explains how you calculate your income for Medicare Levy Surcharge. Using the calculated income, you can predict a surcharge rate that will apply to you. Your income for MLS purpose is the sum of the following items:
- Taxable income (yourself and partner’s taxable income)
- Reportable fringe benefits
- Total net investment losses (including reportable financial investment and rental property losses)
- Reportable super contributions (including employer super contributions and deductible personal super contributions)
You need to sum the relevant items above to get the income amount for MLS purpose. Once you have it, you can find the right rate that will apply to you. Please have a look at the next section.
Find Rates Applicable to Your Income
Once you have your income for MLS purposes, use the table below to find your income threshold and the surcharge rate.
|Base||Tier 1||Tier 2||Tier 3|
|Single Threshold||$90,000 or less||$90,001 – $105,000||$105,001 – $140,000||$140,001 or more|
|Family Threshold||$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%|
Table source: ATO Website
For example, let’s say that you are 35 years old and does not have the proper level of private hospital cover. Your taxable income from 2017 to 2018 is $90,000. When you finished the income test section of the tax return and declares the following items:
- Reportable fringe benefits of $10,000
- Net investment losses of $5,000
Then, your total income for Medicare Levy Surcharge purposes is $105,000 ($90,000 + $10,000 + $5,000). The amount falls into the Tier 1 category that has 1% MLS rate. So, you will pay the surcharge of $1,050. Note that the amount of MLS is calculated only against your taxable income and reportable fringe benefits.
Will the Medicare Levy Surcharge Rate be Risen?
The Australian government sometimes changed the rates in the past. Our concern will be if the government will adjust the income thresholds. The answer is “not too soon”. In the 2016-2017 fiscal year, the government announced that the income thresholds that I just showed you will be frozen until 30th June 2021. Although the government mentioned the income thresholds, it didn’t specifically state about the rates.
How to Prevent Medicare Levy Surcharge
As you have already learned from the previous sections, the Medicare Levy Surcharge is designed for those who earn more than certain thresholds and do not have private patient hospital cover. So, if you have an appropriate level of the private hospital cover, you will not have to pay MLS. Depending on your income, you may be able to get the private health insurance rebate from the government. The rebate is what the government contributes to the cost of your private hospital insurance fees.
You can prevent yourself from paying Medical Levy Surcharge in three ways:
- Review your rebate
- Choose the appropriate level of private hospital insurance
- Vary your PAYG withholding
Let’s have a look at each item in more detail.
Review Your Rebate
This is not exactly to prevent the Medical Levy Surcharge. But, when you start using a private health insurer, they may give you upfront health insurance rebate that reduces the premium you pay. But, if your income for surcharge purposes is above the thresholds, you may receive too much rebate. This may result in a private health insurance liability during your tax return lodgement.
To prevent this liability, you can contact your private insurer to use a new rebate amount, which will lead to less rebate up front.
Choose Appropriate Private Hospital Insurance
Choosing an appropriate patient hospital insurance cover will prevent you from paying the Medicare Levy Surcharge. It is your responsibility to arrange and pay for your cover with the insurer. The information on this website tells me that more than or less than $750 is an appropriate level of cover. For couples or families, more or less than $1,500 is an appropriate amount.
When choosing your insurer, you should make sure that they provide an appropriate level of cover. If your income for MLS purposes exceeds a certain threshold and you don’t have an appropriate level, it may incur Medicare Levy Surcharge. Also, we need to note that general cover, also known as extra covers, is NOT private patient hospital cover. The extra covers include optical, dental, physiotherapy or chiropractic treatment.
Vary PAYG Withholding
By the tax law, you may vary the amount that a payer is required to withhold to meet some special circumstances of a particular case. The goal of varying PAYG withholding is to ensure that the amount withheld during the income year meets your end-of-year tax liability. Since this may not be applicable to all people, I advise you to seek professional advice for this.
We’ve just learned three major ways of preventing Medical Levy Surcharge. I recommend you to check your income for the MLS purposes and find the matched rate. But, the surcharge is only applicable to those without an appropriate level of private hospital cover. If you already have one, you don’t have to worry about it.