Navigating the Australian tax system can be complex, especially when it comes to understanding the Medicare levy and the Medicare levy surcharge. Let’s break these down to help you understand who is required to pay them and how private health insurance impacts your tax return.

Medicare Levy

The Medicare levy is a compulsory charge that contributes to funding Australia’s public healthcare system. Almost all Australian taxpayers pay this levy, which is set at 2% of your taxable income. The levy is generally withheld from your salary by your employer throughout the year, so you might not notice it until you lodge your tax return.

It’s important to note that having private health insurance doesn’t exempt you from paying the Medicare levy; however, it does affect your liability for the Medicare levy surcharge.

In certain situations, you may qualify for a reduction or exemption from the Medicare levy. For example, low-income earners, foreign residents, or those with a medical exemption may be eligible for a reduced rate or complete exemption.

Medicare Levy Surcharge

The Medicare levy surcharge (MLS) is an additional charge designed to encourage higher-income earners to take out private hospital insurance, easing the burden on the public healthcare system. Unlike the Medicare levy, the MLS is not automatically withheld from your income. It is calculated when you lodge your tax return.

You may be liable for the MLS if your income exceeds the MLS threshold and you, your spouse, or your dependent children do not have an appropriate level of private patient hospital cover for the full income year. The surcharge rate depends on your income tier.

Income for MLS Purposes

For the purposes of the MLS, your income includes several components beyond your taxable income, such as reportable fringe benefits, total net investment losses, and reportable super contributions. If you have a spouse, their income is also considered when calculating the MLS.

For the 2024–25 income year, the MLS income thresholds and surcharge rates are as follows:

• Singles:
  • Base tier: $97,000 or less (0% MLS)
  • Tier 1: $97,001–$113,000 (1% MLS)
  • Tier 2: $113,001–$151,000 (1.25% MLS)
  • Tier 3: $151,001 or more (1.5% MLS)
• Families:
  • Base tier: $194,000 or less (0% MLS)
  • Tier 1: $194,001–$226,000 (1% MLS)
  • Tier 2: $226,001–$302,000 (1.25% MLS)
  • Tier 3: $302,001 or more (1.5% MLS)

The family threshold increases by $1,500 for each dependent child after the first.

Private Health Insurance

To avoid the MLS, you must have an appropriate level of private patient hospital cover. For singles, this means a policy with an excess of $750 or less. For couples or families, the policy should have an excess of $1,500 or less. Your policy must cover you, your spouse, and all dependents for the full income year to avoid the surcharge.

It’s important to note that extras-only cover (e.g., dental or optical) and travel insurance do not qualify as private patient hospital cover for MLS purposes.

Next Practical Steps

• Review your income: Regularly assess your income to determine if you’ll be required to pay the MLS. The ATO provides a useful income tests calculator.
• Evaluate your insurance: Consider whether taking out private health insurance is beneficial, especially if your income is above the MLS threshold. Having the right coverage can save you money.
• Understand your policy: Ensure that your private health insurance policy meets the requirements to avoid the MLS. Double-check the excess amounts and confirm that it covers all necessary family members.
• Consult a professional: If you’re unsure about your obligations or need tailored advice, consult a tax professional or financial advisor who can help you navigate your specific situation.
• Stay informed: Tax regulations and thresholds can change, so it’s important to stay up-to-date on any changes that might affect your obligations.