Income tax
Medicare levy
The Medicare levy is a charge on taxable income, generally 2%, that helps fund Australia's public health system, paid by most resident taxpayers with their income tax.
The Medicare levy is collected through the income tax system to help fund Medicare. For most Australian residents for tax purposes, it is generally 2% of taxable income. It is calculated and assessed on your tax return, and your notice of assessment shows the amount. For employees, it is also factored into the tax withheld from pay.
Low income earners may pay a reduced levy or none at all. Reductions and exemptions depend on taxable income and family circumstances, with the thresholds set by legislation and changing over time. Some people are exempt for medical or other reasons, such as certain foreign residents, or holders of particular visas, and they may need to apply for an exemption certificate.
The levy is a separate item from the income tax shown on the rate scale. It is added on top, and so it forms part of your total tax bill. When estimating the tax impact of extra income or deductions, include the levy, as a $1,000 change in taxable income changes the levy by about $20 at the standard rate.
Some people also pay the Medicare levy surcharge, which is an additional charge for taxpayers above certain income levels who do not hold appropriate private hospital cover. The surcharge is a separate amount and is not part of the 2% levy. The income thresholds are set by legislation and are reviewed, so check the ATO for the current ones.
Foreign residents generally do not pay the Medicare levy, as they are not entitled to Medicare benefits in the usual way. Whether you are a resident for tax purposes can differ from the immigration or Medicare eligibility tests, so someone could be a resident for tax and be treated differently for Medicare. Clarify the position with the ATO if you are unsure.
The levy has no connection with GST, which is a tax on sales. A business owner pays the levy on personal taxable income as part of their individual return. Companies do not pay the levy. Rates and thresholds can change, so verify current details. This is general information only, so confirm your position with the ATO or a registered tax professional.
Worked example
Taxable income of $80,000 with a 2% Medicare levy gives a levy of $80,000 x 2% = $1,600. This is added to the income tax calculated on the resident rate scale. If the person's taxable income rises by $5,000 to $85,000, the levy rises by $5,000 x 2% = $100, in addition to the extra income tax.
Practical tips
- Include the 2% levy when estimating tax on extra income, since it applies on top of the income tax rates.
- Do not mix up the Medicare levy with the Medicare levy surcharge, which applies only in specific circumstances.
- If you think you qualify for a reduction or exemption, check the ATO guidance and apply where needed.