Income tax
Medicare levy surcharge
The Medicare levy surcharge is an extra charge on higher income earners who do not hold appropriate private hospital insurance, separate from the standard Medicare levy.
The Medicare levy surcharge is designed to encourage people who can afford it to take out private hospital cover, reducing pressure on the public system. It applies to taxpayers whose income for surcharge purposes is above set thresholds and who, along with their dependants, do not hold an appropriate level of private patient hospital cover for the whole year or part of it.
The surcharge is charged in addition to the Medicare levy, not instead of it. It is assessed on your tax return, and your notice of assessment shows the amount. The rate depends on your income tier, with higher income tiers attracting higher rates. The thresholds and rates are set by legislation and are reviewed from time to time, so check the ATO website for the current figures.
Income for surcharge purposes is wider than taxable income. It generally includes taxable income, reportable fringe benefits, net investment losses, reportable super contributions and some other items. This means a person whose taxable income looks modest might still be over the threshold once these extra items are added. Salary packaging arrangements can therefore matter here.
Families and couples have a combined family income threshold, which is higher than the single threshold and increases for each dependent child after the first. The test looks at the family as a whole, so you should consider both partners' incomes when working out whether the surcharge applies. A couple pays the surcharge where either partner or a dependant lacks the required cover.
The cover must be a hospital policy that meets the requirements, and a policy with an excess above a specified limit may not count. Extras-only cover does not satisfy the test, because it does not include hospital cover. If you took out cover part way through the year, you may only pay the surcharge for the days you were uncovered.
The surcharge is not connected to GST. It is relevant to business owners mainly because business profit contributes to taxable income, and partners and sole traders may find their total income above the threshold. Compare the cost of the policy with the surcharge before deciding. This is general information only, so confirm your position with the ATO or a registered tax professional.
Worked example
Suppose a single person has income for surcharge purposes above the current threshold, taxable income of $120,000, and no private hospital cover. If, for illustration only, the surcharge rate for their tier were 1.0%, the surcharge would be $120,000 x 1.0% = $1,200 on top of the 2% Medicare levy of $2,400. Actual thresholds and rates are on the ATO website.
Practical tips
- Add reportable fringe benefits and super contributions to taxable income when checking whether you are over the threshold.
- Remember extras-only policies do not satisfy the hospital cover requirement.
- Compare the annual surcharge with the cost of hospital cover before deciding, using current figures from the ATO.