Medicare and Private Health Cover
Government taxation arrangements for Medicare are complex. They provide:
incentives for high income earners to have private health insurance by charging higher levels of tax through the Medicare Levy Surcharge;
Incentives for those on lower incomes with a Private Health Fund Rebate; and
Incentives for younger Australian’s who may earn a high income in the future to act now.
Accordingly, there are a number of elements that might change your view on private health cover, but particularly your income and your age. Taxpayers should be anticipating their income for the year and whether they reach the income and age thresholds.
Medicare Levy Surcharge
Most taxpayers earning above $24,276 a year will pay the 2 per cent Medicare Levy. This is reduced if you earn between $24,276 and $30,346.
High-income earners have to also pay a Medicare Levy Surcharge if they do not have private health cover. As of July 1, the surcharge will apply when taxpayers earn above $93,000 as a single and $186,000 as a family. Previously, the surcharge started when taxpayers reached incomes of $90,000. The surcharge increases as your income increases, as follows:
where a taxpayer’s income for Medicare Levy Surcharge (MLS) purposes is between $93,001- $108,000, they will pay an additional 1 per cent tax.
where a taxpayer’s MLS income is between 108,001 and $144,000, the surcharge is 1.25%.
Where a taxpayer’s MLS income is more than $144,001 (or $288,001 as a family), the surcharge is 1.5%.
Your MLS income includes the value of fringe benefits identified on your payment summary and adds any superannuation salary sacrifice and personal concessional contributions. Losses you might have earned on an investment property or other commercial arrangement are also added back.
The Australian Taxation Office gives the example of a 35-year-old single man earning $117,000. He will face a 1.25% surcharge , or an extra $1,462.50 in tax. Similarly, someone earning $100,000 would face a 1% surcharge, or an extra $1,000 in tax.
The surcharge is also based on how long you’ve had the insurance. That is, taxpayers do not save tax by taking out cover in the last week of June. Instead, they pay the surcharge based on income earned in the 51 weeks of the year until then.
So those on higher incomes are faced with a question of whether to take out at least basic health cover or pay the additional tax (the Medicare Levy Surcharge). But we wish it was that simple………
Other matters to consider include:
Private health fund rebate
While increasing tax costs through the Medicare levy Surcharge, the government also offers a private health fund rebate – again, based on your income. If taxpayer’s MLS income is less than $93,000 and they take out private health cover, they will receive a 24.61% rebate. That falls to 16.41% if their MLS income is up to $108,000 and 8.2% if income is up to $144,000. There is no rebate if your income exceeds $144,000.
Lifetime health cover loading
Regardless of income, if you have not taken out and maintained private hospital cover from July 1 following your 31st birthday, you’ll pay an additional loading to the private health insurance provider on top of your premium. This starts at 2 per cent, and increases by 2 percentage points for every year over the of age of 31 that you do not have cover. So, if you take out cover at 40, you could pay 20 per cent more in premiums. The loading caps out at 70 per cent.
The system is designed to encourage people to take out some level of cover earlier, rather than waiting until their income reaches a certain threshold that makes the decision more cost effective. Also note that the Private Health Fund Rebate (above) does not apply to the Lifetime health cover loading.
Free health cover for young adults on a family policy
Choice also notes in an article dated 31 May 2023 that “with Australians feeling the pinch as the cost of living increases, many young adults are still living with their parents and now they can stay on the family health insurance policy.
As of 2021, the government has increased the age cap for adult children on their parents’ policy from 24 to 31. At the same time, the age limit was removed for dependants living with disability (NDIS participants).
But if the young adult isn’t a full-time student, parents will cop an extra cost on top of their policy, so is it actually worth it? While children and full-time students up to age 31 can often stay on the regular family policy for free, there would usually be an additional cost to keep older dependants and non-students covered – depending on the insurer, this can add up to 30% to your premium.
Given that a single policy usually costs 50% of a family policy, it’s a good idea to keep your kids on your family policy while there’s no additional cost. But once you need an extended family policy, it’s time to carefully consider everyone’s cover needs. If you’re on a top cover policy it could be cheaper insuring your adult dependant on their own low to medium cover policy – especially if you have a family income of $180,000 or higher and don’t get the full health insurance rebate.”
Conclusion
Without even considering the type of policy you might have and the benefits it provides (which is so very important), nor the possible opportunity cost of not having private cover, in terms of what else you might invest in, the maths on this issue is complex and decisions you make bear some thought. As with everything in life, there are possibilities, opportunities and costs. You need to put the hard yards, look at the opportunities and “do the math”, to make the right choices for you and your family.
Peter Debus is a director of PrincipleFocus, a Chartered Accountant and Chartered Tax Adviser.
