All you need to know about the Medicare surcharge levy

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If you don’t have an ‘appropriate’ level of private hospital cover and you’re a single person earning more than $90,000 per annum (or a family with an income above $180,000), I’m afraid you’re a candidate for the Medicare surcharge levy (MLS).


Don’t confuse the surcharge with the Medicare levy, which most of us must pay.


This surcharge is an additional tax.


It’s intended as an incentive for higher income earners to take out at least a minimum level of private hospital insurance – and ideally full hospital and extras insurance.


The idea is that those who can afford to pay for health insurance should do so, to reduce the burden on the public system.


What is ‘appropriate’?

The current government requirement for an ‘appropriate level of insurance’ for singles is a policy with an excess of $500 or less. For couples or families, the excess must be $1,000 or less.


Appropriate Level of Insurance

Appropriate cover also means a policy that covers all your dependents. If you have a newborn or toddler, don’t think they’re too young to count – they absolutely do and you could end up paying the MLS if they aren’t included in your insurance policy.


Unlike the Medicare levy, the surcharge is a one-off calculation based on your annual taxable income, which you’ll pay when you lodge your annual tax return. Deductions for the Medicare levy, on the other hand, will be made by your employer from your pay packet throughout the year, just like income tax.


The amount of MLS you’ll have to pay will depend on your income. Unlike the Medicare levy which is a flat 2%, the MLS is a variable amount based on your income tier.


Base tier Tier 1 Tier 2 Tier 3
Single threshold $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 +
Family threshold $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 +
Surcharge 0% 1% 1.25% 1.5%

By the way, the family income threshold increases by $1,500 for each child after the first.

Since the MLS is income-based, the only way to calculate how much MLS you’ll pay is to calculate your taxable income first.

The Australian Tax Office (ATO) determines your Assessable Income based on:

The Australian Tax Office (ATO) determines your Assessable Income based on:


  • Your salary and wages – including cash and cheques 
  • Any commission you receive as salesperson 
  • Any tips, gratuities and other payments you receive for your services 
  • Any bonuses and overtime payments you receive as an employee 
  • Any additional allowances you receive for things like car, travel, clothing and laundry i.e. fringe benefits from your employer 
  • The interest you earn from bank accounts 
  • Any dividends or other income you receive from investments 
  • Your pensions 
  • Your rental income if you own investment property

Your Taxable Income is all the above less all your allowable tax deductions. These include:



You may also be able to claim other deductions, such as:



Of course, you’ll have to pull all this information together for your tax return each year (quite possibly with the help of your accountant). Once you file that return, the ATO will have the information they need to assess whether you are liable for the MLS – and exactly how much to charge you.


Note that if you have a spouse/de facto it is your combined income that will determine the amount of the MLS your family will have to pay.


Combined Income Medical Surchange Levy

The surcharge will apply for any part of the year when you didn’t have appropriate hospital cover – so don’t think you can take out cover just before lodging your tax return and avoid the surcharge!


You and all your family will need to have cover for the whole financial year if you are above the income thresholds and don’t want to pay the MLS.


Oh, and if you just take out extras cover, you’ll still be hit with the surcharge. It’s the hospital cover which counts when it comes to the MLS.


One small complication


Private health insurance reforms came into force on April 1, 2019 creating four tiers of cover – gold, silver, bronze or basic. The reform is an attempt to make insurance simpler, so that it will be easier for us all to compare providers. Insurance providers have until 2020 to bring in the changes.


So far, the government hasn’t given any indication of what will count as ‘appropriate’ cover under the reforms – so it’s hard to know which tiers, if not all, will exempt you from paying the Medicare levy surcharge.

Watch this space!

Conclusion

If you score a salary increase, get a one-off bonus or earn a higher than usual amount of commission during the current financial year, you’ll need to think about the tax implications of your increased earnings.


Use this medicare levy surcharge calculator to calculate your taxable income, medicare levy and medicare levy surcharge liabilities, so you don’t get a nasty shock around tax return time.


Do it early enough and you can make changes (like buying that health insurance cover) to make sure your extra tax bill won’t have you regretting your stellar performance during the year.