In Australia, private health insurance plays a significant role in your tax obligations, especially if you are a higher-income earner. The government encourages people to take out private hospital cover by offering incentives and imposing additional tax charges for those who do not. This detailed guide explains whether you need private health insurance to avoid extra tax, how the Medicare Levy Surcharge works, and what options are available to help you make an informed decision.
What Is the Medicare Levy Surcharge (MLS)?
The Medicare Levy Surcharge is an additional tax imposed on Australian taxpayers who earn above certain income thresholds and do not have an appropriate level of private hospital insurance. It was introduced to encourage people to take up private health insurance, reducing pressure on the public Medicare system.
The surcharge is calculated as a percentage of your income and is payable on top of the standard 2% Medicare Levy.
Who Needs Private Health Insurance to Avoid the MLS?
You need private hospital cover to avoid paying the MLS if:
- Your taxable income exceeds the MLS thresholds ($90,000 for individuals and $180,000 for families as a general guide)
- You do not have an eligible private hospital insurance policy
If you meet these conditions and do not have the required cover, you will be liable to pay the MLS when you lodge your tax return.
What Counts as Eligible Private Health Insurance?
To avoid the MLS, your private health insurance policy must include hospital cover. Extras-only policies (such as dental or optical coverage) do not qualify.
Eligible policies must meet minimum standards set by the government, and most standard hospital cover policies offered by insurers qualify.
Income Thresholds and MLS Rates
The MLS applies progressively based on your income for MLS purposes, which includes taxable income plus certain fringe benefits and investment losses.
The surcharge rates are:
- 1% of income if you earn between $90,001 and $105,000 (individual) or $180,001 and $210,000 (family)
- 1.25% if you earn between $105,001 and $140,000 (individual) or $210,001 and $280,000 (family)
- 1.5% if your income exceeds $140,000 (individual) or $280,000 (family)
Benefits of Taking Out Private Health Insurance
- Avoid the MLS: Save on extra tax payments by meeting the private hospital cover requirement.
- Access to private healthcare: Shorter waiting times and more treatment options.
- Government rebates: You may be eligible for a private health insurance rebate that reduces premiums.
- Peace of mind: Protection against unexpected medical costs.
What If You Don’t Have Private Health Insurance?
If you do not have the required private hospital cover and your income is above the thresholds, you must pay the Medicare Levy Surcharge when you file your tax return. This means:
- Your overall tax payable will increase by the surcharge amount.
- You can avoid paying the surcharge in future years by taking out appropriate private hospital insurance.
Are There Any Exemptions or Special Cases?
Some individuals may be exempt from paying the MLS or eligible for reductions, including:
- Those on certain government income support payments
- Individuals living overseas for a significant part of the year
- Those experiencing financial hardship
- Low-income earners below the surcharge thresholds
You must declare any exemption claims in your tax return.
How to Check If You Need Private Health Insurance
To determine if you need private health insurance to avoid the MLS:
- Review your taxable income and combined family income
- Check if you currently have eligible private hospital cover
- Use the ATO’s online calculators and tools for Medicare Levy and MLS estimates
- Consult a tax professional for personalised advice
Conclusion
Whether you need private health insurance to avoid extra tax depends primarily on your income and current insurance status. If your income exceeds the Medicare Levy Surcharge thresholds and you do not have eligible private hospital cover, you will face additional tax charges. Taking out appropriate private hospital insurance can help you avoid this surcharge and provide other health benefits.
Staying informed about your tax obligations and health insurance options enables you to make the best financial and health decisions. Always consider your personal circumstances, and seek professional advice if needed to optimise your tax position.
