Wednesday, 27 June 2012

Insurance: How does the medicare levy surcharge work?

A quick pre-tax time tip re health insurance.  Every single year before June 30 health insurers go on an advertising binge telling prospective customers to 'get in before June 30'.  This is aimed at those who, because they earn above a certain limit and do not have private health insurance, are charged the medicare levy surcharge. 

However please note that the surcharge you pay is based on the number of days covered by health insurance during the year.  Getting health insurance right before June 30 does not eliminate your obligation to pay the surcharge for the rest of the year.

For example if you were to get health insurance on the 26th of June and earned above the threshold (e.g. assume you earned $100,000 and were a single person) then your Medicare levy surcharge would for 2011 / 2012 would then be:
  • Number of days uncovered / Days in a year = 361 / 365 = 98.9%
  • MLS surcharge on income = 1% * 100,000 = $1,000
  • MLS obligation for the tax year = $1,000 * 98.9% = $989
So there is no real incentive to take up health insurance before the end of the financial year but there is definetely incentive to take it up quickly. Further the intoduction of a tiered surcharge system means that all middle and high income earners should look very seriously at what health insurance would best suit them.

Background - how does the Medicare Levy Surcharge work?

The medicare levy surcharge is a tax based incentive to get insurance.  It works as a big stick - if you earn above a certain limit and do not have health insurance then you pay an extra tax (which can be quite steep).  I have outlined below the incomes at which you become liable for the surcharge for the 2011 / 2012 financial year (note that income includes gross wage, reportable fringe benefits and employer superannuation contributions)

Category Income Threshold Surcharge
Single, No dependents $80,000 1%
Single, Depdendent children $160,000 1%
Couple $160,000 1%

In the 2012 / 2013 year there has been a change to the way in which the MLS is calculated including a significant increase in the MLS if you do not have private health insurance. There was also the introduction of a tiered system - Below I have outlined the new MLS thresholds and surcharges.

Unchanged Tier 1 Tier 2 Tier 3
Singles <$84,000 $84,001 - $97,000 $97,001 - $130,000 >$130,000
Families <$168,000 $168,001 - $194,000 $194,001 - $260,000 >$260,000
Surcharge 0.0% 1.0% 1.25% 1.5%

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