Two lines on your tax return confuse a lot of people: the Medicare levy and the Medicare levy surcharge. Here’s what each one is, who pays them, and how private health insurance comes into it.
Medicare is Australia’s public health insurance system. It covers free treatment in public hospitals and subsidises visits to GPs and specialists, along with many tests and procedures.
It’s mostly funded from general tax revenue, but there are two specific charges on your tax return that are linked to it.
The Medicare levy
The Medicare levy is 2% of your taxable income. It’s paid by most Australian taxpayers on top of their income tax, and is usually withheld from your pay along with income tax.
People on low incomes pay a reduced levy or none at all. The thresholds are adjusted each year, and are higher for seniors and pensioners and for families.
Some people are exempt, including certain foreign residents and people entitled to full free medical treatment through the Defence Force or Veterans’ Affairs.
The Medicare levy surcharge
The Medicare levy surcharge is different. It’s an extra charge on higher-income earners who don’t have an appropriate level of private hospital insurance.
Its aim is to encourage people who can afford it to take out private cover, reducing pressure on the public hospital system.
The surcharge is 1%, 1.25% or 1.5% of income, depending on how much you earn. It applies once your income for surcharge purposes passes a threshold, which is adjusted each year and is higher for couples and families.
It only applies for the days in the year that you didn’t have eligible private hospital cover. Extras cover alone, such as dental and physio, doesn’t count.
Private health insurance and tax
For many higher earners, the cost of a basic private hospital policy can be less than the surcharge they would otherwise pay, which is why many people take out cover for tax reasons.
There are other incentives too. Lifetime Health Cover adds a loading of 2% to the cost of hospital cover for every year after you turn 31 that you didn’t have it, up to a maximum of 70%. The loading is removed after 10 continuous years of cover.
The Government also pays a private health insurance rebate to help with the cost of premiums, which is means-tested and reduced or removed for higher earners.
Whether private cover is worth it depends on your income, age, health and how much you value shorter waiting times and choice of doctor for non-urgent treatment.
