Introduction
The Medicare Levy Surcharge (MLS) is a crucial aspect of Australia's healthcare financing, aimed at encouraging high-income earners to obtain private hospital insurance. This initiative helps reduce the demand on the public Medicare system but also aids in balancing the healthcare funding mechanism. Understanding the MLS is essential for taxpayers who want to make informed decisions about their healthcare coverage and tax obligations.
This blog post will clarify the purpose of the MLS, how it works, and its implications for you. By providing clear insights into the surcharge, we aim to address all important questions, helping you navigate the complexities of the MLS and its impact on your healthcare choices.
Key takeaways
- The medicare levy surcharge (MLS) is an additional levy for Australian high-income earners without private hospital insurance.
- The MLS rates vary between 1%, 1.25%, and 1.5% based on income tiers.
- Income for MLS purposes includes taxable income, reportable fringe benefits, net investment losses, and reportable super contributions.
- The MLS applies only to individuals and families with incomes above specific thresholds.
What is a medicare levy surcharge?
The medicare levy surcharge or MLS is an extra levy paid by Australian taxpayers on top of the 2% Medicare levy. If you are a high-income earner and have already paid the MLS and wish to avoid paying it in the future, get the appropriate level of private health insurance coverage for you, your spouse, and any dependents.
Is it necessary to maintain hospital coverage for the entire fiscal year?
Yes, it is necessary to maintain hospital coverage for the entire fiscal year to avoid the MLS. You will not be subject to the surcharge if you maintain hospital coverage starting from 1 July throughout the fiscal year. However, if you obtain hospital coverage after 1 July or do not keep your coverage for the entire fiscal year, you will incur the surcharge for each day you are without hospital coverage.
What is the difference between the medicare levy and the medicare levy surcharge?
Although they are frequently mistaken for one another, the Medicare Levy and the medicare levy surcharge differ. Two primary differences exist between the Medicare levy and the medicare levy surcharge.
The first difference is the income threshold for eligibility. The medicare levy surcharge is designed explicitly for higher-income earners, applying only to individuals with annual incomes above $93,000.
This threshold is $186,000 for couples and families, with an additional $1,500 added for each dependent child. Children aged 21 and under are typically considered dependents for the surcharge, and the scheme also extends this to include full-time students aged between 21 and 24.
In contrast, the standard medicare levy applies to all Australian taxpayers, at a rate of 2% of their taxable income. However, exemptions and reductions are available for low-income earners and other categories under the standard Medicare levy.
The second key distinction is in the income calculation for the surcharge. It includes taxable income and factors in reportable fringe benefits, contributions to superannuation, net investment losses, and, for those married, their spouse's income. This broader assessment aims to accurately reflect an individual's or family's capacity to pay the surcharge.
What is the rate of medicare levy surcharge?
The MLS rate is 1%, 1.25%, or 1.5%. It is an amount you need to pay on top of the Medicare levy if:
- You, your spouse, and any dependent children lack appropriate private hospital insurance, and
- Your taxable income is above the threshold amount.
What is the threshold amount of the medicare levy surcharge?
The threshold amount of MLS for the year 2023-24 is discussed in the table below:
| MLS Income Threshold Amount And Rate For 2023-24 | ||||
|---|---|---|---|---|
| Base Tier | Tier 1 | Tier 2 | Tier 3 | |
| Single threshold | $93,000 or less | $93,001 – $108,000 | $108,001 – $144,000 | $144,001 or more |
| Family threshold | $186,000 or less | $186,001 – $216,000 | $216,001 – $288,000 | $288,001 or more |
| Medicare levy surcharge | 0% | 1% | 1.25% | 1.5% |
Please note that for families subject to the Medicare Levy Surcharge, the income threshold increases by $1,500 for each dependent child after the first.
How is the medicare levy surcharge calculated?
For calculating the MLS, the Australian Taxation Office (ATO) considers your "Income for MLS purposes," which includes the following components:
Taxable income: This is your total income after deductions, but it also includes the net amount on which family trust distribution tax has been paid. However, it does not include any amount released to you under the First Home Super Saver Scheme as taxable income.
Reportable fringe benefits: Other than salary, these are benefits from your employer, valued over $2,000 in a year. These must be reported to the ATO and are included in your income for MLS purposes.
Total net investment losses: It includes both net financial investment losses and net rental property losses.
Reportable super contributions: These include both reportable employer super contributions and deductible personal super contributions.
If you have a spouse, their share of the net income of a trust on which the trustee must pay tax (under section 98 of the Income Tax Assessment Act 1936) that hasn't been included in their taxable income.
Additionally, if you had exempt foreign employment income, this should be added to your taxable income if your taxable income is $1 or more.
Note: If you meet both conditions above, you can lower your MLS income using the taxed part of a super lump sum (except for death benefits) up to your (or your spouse's) low cap. This is possible if you or your spouse are between your preservation age and 59 years old and have received a super lump sum.
Let’s understand the income calculation for MLS purposes in a better way with an example given below:
Example:
In the 2023-24 income year, John doesn't have the appropriate level of private patient hospital cover and is:
- 35 years old
- Single without any dependants.
John's financial situation for the year includes:
- Taxable income: $95,000 from his employment.
- Reportable fringe benefits: $20,000, which John receives from his employer. These benefits are valued items like a company car or phone, which must be considered in his income for MLS purposes.
- Net investment losses: $4,000, representing the shortfall from his investment activities, including both financial investments and rental property losses.
- Reportable super contributions: $5,000, covering the contributions to his superannuation that are above the compulsory contributions made by his employer, as well as any personal super contributions John has claimed as a deduction.
To determine his income for Medicare levy surcharge (MLS) purposes, John needs to sum up these components:
Total income for MLS purpose = $95,000 + $20,000 + $4,000 + $5,000 = $124,000
As John's total income for MLS purposes is $124,000, he falls within the Tier 2 category. This subjects him to a 1.25% Medicare levy surcharge.
Therefore, John’s MLS liability for 2023–24 is $1,550. ($124,000 × 1.25%).
Who is exempt from paying the medicare levy surcharge?
If you are single and earn less than $93,000 or are in a couple or family with an income below $186,000 (adding $1,500 for each child after the first), you do not have to pay the medicare levy surcharge.
Those earning above these thresholds but maintaining private hospital insurance are exempt from the surcharge when covered.
The Australian Taxation Office identifies several exceptions that could make you eligible for a full or partial exemption from the surcharge. You may qualify for an exemption if you:
- Have specific medical conditions or treatments that qualify for a medical exemption, including being a blind pensioner, receiving a sickness allowance from Centrelink, or entitled to full free medical treatment under Defence Force arrangements or with a Veterans’ Affairs Repatriation Health Card (Gold Card).
- Were you a foreign resident for tax purposes for the entire year, for a part of the year without any dependants, or if all your dependants were in a Medicare levy exemption category during that period.
- Are not entitled to Medicare benefits, typically applicable to non-residents or temporary visa holders not covered by a reciprocal healthcare agreement.
- Support dependants that are Australian residents for tax purposes, such as a spouse or children up to 24 years old, engaged in full-time studies, with their adjusted taxable income for the period being below $282 plus an additional $28.92 for each week you provided for them.
Tips to avoid paying the medicare levy surcharge
Here are a few ways to avoid paying the medicare levy surcharge:
Ensure you have private patient hospital cover that meets the specific requirements. For individuals, the policy must have an excess of $750 or less, and for couples or families, an excess of $1,500 or less. This coverage must be covered by a registered health insurer for hospital treatments in Australian hospitals or day hospitals.
Not all health insurance products count towards avoiding the MLS. General cover (also known as 'extras'), which includes dental, optical, and physiotherapy services, does not qualify as private patient hospital cover. Similarly, travel insurance and cover provided by overseas funds are not considered adequate for MLS exemption purposes.
If you plan to travel overseas, think carefully before cancelling or suspending your private patient hospital cover. While you may save on premiums during your travel period, you could be liable for the MLS. It's advisable to compare the cost savings from cancelling or suspending the cover against the potential surcharge cost.
The requirement to pay the MLS is also income-dependent. Regularly review your income levels in relation to the MLS thresholds and adjust your health insurance coverage accordingly to ensure it meets the requirements for avoiding the surcharge.
If you're unsure about your coverage or how to navigate the requirements to avoid the medicare levy surcharge (MLS), we're here to help. At ZedPlus, we guide you through the tax benefits of private health insurance and ensure you stay compliant while maximising your tax advantages. We have expertise in Australian tax laws, so we can advise you on how different health insurance policies affect your taxes, help you claim rebates, and offer strategies to avoid surcharges.
Ending note
Hopefully, you should now understand the medicare levy surcharge and whether you’re eligible for an exemption or reduction. The MLS is an additional tax on top of the standard Medicare levy for high-income earners who do not hold adequate private hospital insurance. To avoid paying the MLS, it is important to maintain the appropriate private health insurance coverage and regularly review your coverage and income levels to ensure compliance with these requirements.
If you have any questions or need assistance navigating the medicare levy surcharge, our team at ZedPlus is here to help. We can provide expert advice and guidance on finding the right private health insurance policy that meets your needs while maximising your tax benefits. Remember, being proactive about managing your taxes can save you money in the long run! So, make sure to stay informed and consult with professionals if needed to ensure you are taking advantage of all available tax benefits.