We recently got asked this question by a client who wanted to understand Private Health Insurance (PHI) and the Medicare Levy. Let us take it back to basics.
Medicare levy
Most Australians pay the Medicare levy of 2% of their taxable income as part of their tax to help fund some of Australia’s public health system known as Medicare. This is collected from you in the same way as your income tax. Generally, the Pay As You Go (PAYG) amount your employer withholds from your salary or wages (the tax deducted from your gross pay), includes an amount to cover the Medicare levy.
Medicare Levy Surcharge (MLS)
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If you, your spouse or dependant children do not have an appropriate level of private patient hospital cover and your income is above a certain amount, you may pay an extra surcharge. This can be up to 1.5% of your taxable income.
If you, your spouse or any of your dependants have an appropriate level of private patient hospital cover, you won’t have to pay the MLS, and depending on your income, you may be eligible for the private health insurance rebate. This rebate is an amount the Government contributes towards the cost of your private health insurance premiums. Most of us prefer to pay less for our premiums by deducting the full rebate (30%), thus when we do your tax return, there might be an “adjustment” if you earned too much.
Depending on your circumstances, the Medicare levy, the MLS or variations to your private health insurance rebate may impact the refund you receive or the tax you owe (known as the Medicare Levy Excess) which our client ended up paying.
TIP: If the MLS has resulted in you owing tax, you can take steps to avoid a liability in the future by:
- reviewing your private health insurance rebate
- taking out the appropriate level of private patient hospital cover
- varying your PAYG withholding
Medicare levy EXCESS
We have had instances where, clients have claimed the full Government rebate through lower premiums and when lodging their returns, because of their COMBINED (FAMILY) TAXABLE income being over the threshold, they were forced to pay/refund the extra adjustment. This is called “the Medicare Excess”. Even if you are paying your PHI premium as a “single”, the ATO has sophisticated software that combines your taxable income to your spouse/de facto to arrive at the correct entitlement of your rebate.
Lifetime Health Cover (LHC) loading
The LHC loading is a government initiative to encourage Australians to get health insurance before they turn 30. For every year after you turn 30 that you have not been insured you will pay a 2% loading on top of your premium.
You only need basic hospital cover to avoid LHC loading. For more detail on how the LHC works, see PrivateHealth.gov.au.
Age-based discount
Some insurers offer a discount for new and existing customers aged 18—25. The discount can be up to 10% off your premiums until you turn 41. For more information visit PrivateHealth.gov.au.
If you need to discuss any of the above, do not hesitate to contact the office, we will be glad to discuss your personal circumstances.