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What is the Medicare levy and what will you pay?

Written by

Shaun McGowan

“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin said that in 1789. Nothing much has changed, has it?

If you live, work and earn money in Australia you may be liable for the income tax Medicare levy. Do you know what it is, what it does and why you are paying it?

Maybe you don’t, because it’s just another item on your payslip, taken care of by your employer.

If so, you’re reading the right article.

What is the Medicare levy?

In a nutshell, it’s a tax based on how much you earn. Back in 1984 it was one per cent of taxable income for everyone, except those on a very low income. It now sits at two per cent of your taxable income.

Medicare, originally known as Medibank, was introduced by Gough Whitlam in 1974. It was then changed substantially by Malcom Fraser in 1976, and taken back to its roots in 1984 by Bob Hawke. There’s been little change by any government since then.

The Medicare levy partially funds Australia's national health insurance scheme. Technically, as a tax payer, you’re paying for the lot – but let’s not get distracted by that.

It’s interesting that over the years, the levy has been increased and used to pay for other items of government spending – such as John Howard’s gun buy-back scheme. But most of the cash it brings in is still used fund health related issues.

How is the Medicare levy calculated, you may ask?

It’s quite straight forward, actually. Your taxable income calculated in your annual tax return will determine how much Medicare levy you pay.

If you earn more than $27,068 per year if you’re single, or $45,676 plus $4,195 for each of your dependent children if you’re part of a family, you will pay an extra two per cent tax to cover Medicare.

So, if you earn $50,000 per year, you’ll pay $1,000 of your taxable income.

Who is exempt from the Medicare levy? There are a few exceptions to the rule. Are you one of them?

The answer is ‘yes’ if you:

  • Are a foreign resident
  • Are a Norfolk Island resident
  • Aren’t entitled to Medicare benefits
  • Earn less than $21,335 per year (or $33,738 for seniors and pensioners).

Others who earn less than $26,668 per year (or $42,172 for seniors and pensioners) only pay part of the Medicare Levy.

Private treatments are covered under Medical Loans

But there’s a catch...

Even if you’re not entitled to Medicare benefits, you could still pay the Medicare levy.

Yep, you heard that right.

To be exempt you must be a permanent resident of Australia and fall into one of these categories:

  • Lived outside Australia for 12 months or more and didn’t come back to live in Australia permanently
  • A temporary visa holder who applied for permanent residency
  • An Australian citizen living overseas for five years or more
  • A New Zealand citizen who spent less than six months in Australia within a 12-month period
  • A visitor to Australia and not eligible for Medicare under a Reciprocal Health Care Agreement

To prove you’re exempt from paying the levy and that you qualify on any of the above criteria, you’ll need a Medicare Entitlement Statement.

For more information, head to Medicare.

There are also some medical grounds exemptions – but as it’s quite a lot to absorb, it’s best if you go to the Australian Tax Office (ATO) site for all the detail.

Ok, so what about the Medicare Levy surcharge?

The Medicare Levy and the Medicare Levy Surcharge are different beasts.

The Medicare Levy Surcharge kicks in with an additional 1% - 1.5% if you earn more than $90,000 (for singles) and $180,000 (for families) annually AND if you don’t have what the ATO deems to be an ‘appropriate’ level of private patient hospital insurance.

Right now, the ‘appropriate’ level of insurance is cover with an excess of $500 or less for singles, and an excess of $1,000 or less for couples or families.

How is your income calculated for the surcharge?

The ATO determines your income based on:

  • Taxable income
  • All those reportable fringe benefits listed on your PAYG payment summary
  • Total net investment losses
  • Super contributions – both personal and employer super contributions
  • Spousal trust income
  • Exempt foreign employment income (but only if you or your spouse received a taxable income of $1 or more).

The percentage of tax will increase if you exceed the thresholds and don’t have an ‘appropriate’ level of cover – and you could pay about $75.00 per month more on those salaries.

By the way, if you and your partner have private hospital insurance and you have children who aren’t covered by your policy, you could still be hit with the surcharge. So no matter how young they are, include them under your policy.

This is the government’s way of encouraging you to take out private hospital cover and to use the private health system.

Warning

The surcharge is calculated DAILY, if you don’t have appropriate cover.

As usual there are caveats – and again the ATO website explains the nuts and bolts. Make sure you purchase your insurance from a registered Australian health fund for a full year.

Oh, and travel insurance is not a substitute for private hospital insurance, so if you’re going overseas and think you’ll suspend your private health insurance, be careful – you could end up liable for the surcharge. Be sure to talk to your insurer before making that decision. Now to confuse you all over again…

If you have been assessed and you must pay the surcharge as well as the levy, your notice of assessment will show one amount on your notice of assessment called Medicare levy and surcharge.

OK that’s the bad news.

But there is a sweetener!

The Private Health Insurance Rebate.

The government will reward you for taking out private health insurance of an appropriate level. Your policy should provide private patient hospital cover or general cover that covers 'extras' or combined hospital and extras.

The rebate is income tested, so if you’re on a higher salary the amount of rebate could be reduced – or you might not qualify at all.

The rebate can reduce the premium you pay to your insurer, or be a refundable tax offset when you lodge your tax return.

Conclusion

If you live and earn money in Australia, the Medicare levy is something you’ll have to contend with.

With all the ‘what, ifs and buts’ involved in getting to grips with the Medicare levy and the Medicare levy surcharge – especially if your income isn’t that simple – you’d be well advised to do your tax return through a tax agent or accountant and get some professional advice along the way.

If you go it alone, the ATO has specific advice relating to the Medicare levy and health insurance and completing your tax return. Good luck!

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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