If you don’t hold private hospital cover – or are thinking about dropping it – make sure you understand the financial consequences. You could be hit with an extra tax surcharge of up to 1.5% or cost yourself extra premiums in future. Don’t get stung! Read our guide to help you make an informed decision about taking out private health cover.
Levies, surcharges and loadings – the terminology around health insurance and tax can be bewildering! But if you don’t hold private hospital cover, you need to understand how this may affect your tax.
Medicare levy surcharge
The Medicare levy surcharge (MLS) is a tax penalty you must pay if you earn above a certain amount and don’t take out a sufficient level of private hospital cover for you and all of your dependants. It’s designed to give you a financial incentive to insure privately. The MLS is applied by the ATO at tax time and included in your assessment.
If you’re a very high income earner, holding private hospital cover to avoid the MLS makes tax sense.
If your income is lower but still above the relevant singles or families threshold (outlined below), you may want to shop around more carefully for a policy that suits your budget. Bear in mind that it’s hospital cover that’s required to avoid the MLS, not extras (so “extras only” policies are not sufficient). Of course, you also need to factor in the other non-tax benefits of holding private health insurance.
So how much extra tax does the MLS mean? It depends on your income. Your income for these purposes is not just your taxable income – it also includes things like reportable fringe benefits, extra salary sacrifice super contributions you make (or personal super contributions) and total net investment losses.
|Income for MLS purposes||Rate of MLS|
|$90,000 or less||$180,000 or less||nil|
|$90,001 – $105,000||$180,001 – $210,000||1%|
|$105,001 – $140,000||$210,001 – $280,000||1.25%|
|$140,001 or more||$280,001 or more||1.5%|
If you have two or more dependent children, the families thresholds above increase by $1,500 for the second and subsequent children.
Note that the MLS is separate to the “Medicare levy”, a 2% levy on your taxable income that most Australians must pay – regardless of whether they have private health cover. So, if you have an MLS liability, you’ll pay this in addition to the Medicare levy.
Lifetime health cover loading and the rebate
Lifetime health cover (LHC) loading encourages Australians to maintain private health cover from an early age. If you don’t take out private hospital cover by the year you turn 31, you’ll be penalised with LHC loading if and when you eventually take out cover in future. You’ll pay an extra 2% of your premium for every year that you’re aged over 30, and this is charged annually until you’ve had 10 years of continuous cover.
For example, if you first take out private cover at age 45, you’ll pay annual loading of 30% (ie 2% x 15) for 10 years. (Note, the maximum possible loading rate is 70%.)
LHC loading isn’t a tax, but it can affect your tax return. This is because any LHC loading portion of your premium doesn’t attract the private health insurance rebate. The rebate is available to singles with income for MLS purposes of $140,000 or less and families with income of $280,000 or less. The percentage rebate available ranges from approximately 8% to 25% of your premiums, depending on your exact income level. You can receive your rebate as either reduced premiums from your insurer or a refundable tax offset from the ATO at tax time.
So, if you’re over 30 and don’t have private hospital cover, it’s time to consider how much each year that you remain uninsured may end up costing you in future premiums.
Talk to us if you have any questions about health coverage. We can help you calculate how much you’ll get back in rebate or how much your uninsured status may be costing you.