To Insure or Not to Insure: Tax Considerations for Private Health Cover

A question we’re commonly asked, as Tax Accountants in Melbourne is, ‘Do I need private health insurance for tax purposes?’. The answer to this question is ‘it depends’.

As a taxpayer, it’s essential to clearly understand whether or not you need private health insurance to minimise your tax liability each year. In this blog, we’ll break down the key points that you need to consider from a tax perspective.

Understanding the Medicare Levy

When it comes to healthcare funding, Australia operates on a system known as Medicare. Under this system, all eligible Australian residents are entitled to subsidised healthcare services.

To fund Medicare, the government imposes a tax called the Medicare Levy, which is based on a percentage of your taxable income.

It's important to note that the Medicare Levy is mandatory for most taxpayers, regardless of whether they have private health insurance.

This means that even if you don't have private health insurance, you're still required to pay the Medicare Levy. However, there are certain circumstances where you may be exempt from paying the full levy or receive a reduction based on your income level or personal circumstances. Consult the ATO website for further details.

Understanding the Medicare Levy Surcharge

In addition to the Medicare Levy, there is another tax known as the Medicare Levy Surcharge. It's not uncommon for clients to experience confusion regarding these two taxes and their implications for our tax positions.

This surcharge is an additional tax imposed on high-income earners who do not have private hospital cover. Its purpose is to encourage individuals with higher incomes to take up private health insurance and ease the burden on the public healthcare system.

The Medicare Levy Surcharge applies to singles earning above a certain income threshold and families earning above a higher income threshold.

At the time of writing, the relevant thresholds are:

Medicare Levy Surcharge income thresholds and rates for 2023 financial year

The table above (taken directly from the ATO website) shows that for 2023 financial year, you will not pay the MLS if your income is less than the base income threshold, which is:

  • $90,000 for singles
  • $180,000 (plus $1,500 for each dependent child after the first one) for families.

Medicare Levy Surcharge income thresholds and rates for 2024 financial year

The table above (taken directly from the ATO website) shows that for 2024 financial year, you will not pay the MLS if your income is less than the base income threshold, which is:

  • $93,000 for singles
  • $186,000 (plus $1,500 for each dependent child after the first one) for families.

If you exceed these income thresholds and don't have private hospital cover, you'll be required to pay the surcharge on top of the standard Medicare Levy.

The surcharge is calculated separately based on different income tiers and can range from 1% to 1.5% of your taxable income in addition to the standard Medicare Levy. Refer to the Australian Taxation Office (ATO) website for the latest thresholds and rates.

However, if you have an appropriate level of private patient hospital cover, you can avoid paying the Medicare Levy surcharge.

What is an appropriate level of private patient hospital cover?

At the time of writing, an appropriate level of private patient hospital cover for single taxpayers is a level of cover that has an excess of $750 or less. For couples or families, the cover must have an excess of $1,500 or less.

What is income for Medicare levy surcharge purposes?

Broady, your income for Medicare levy surcharge purposes is the sum of:

Taxable income - includes your salary, wages, rental income, business income, and any other income that is subject to taxation.

Reportable fringe benefits - If you receive fringe benefits from your employer that are considered "reportable," they may be included in your income for the purpose of calculating the surcharge. Reportable fringe benefits are typically those that exceed a certain threshold and must be reported on your Income Statement.

Total net investment losses - including rental property losses and financial investment losses

Reportable super contributions - Reportable super contributions include additional contributions made to your superannuation fund beyond the mandatory employer contributions. These contributions are often made voluntarily and may include salary sacrifice amounts or personal contributions for which you have claimed a tax deduction.

When it might not make sense to have private health insurance.

First and foremost, it is important to emphasise that the decision to take out private health insurance is a personal one that encompasses factors beyond tax benefits.

However, if your primary focus is solely on tax benefits and you have a clear intention of acquiring private health insurance purely to eliminate the Medicare Levy Surcharge, then it becomes necessary to compare the expenses associated with a private health insurance policy (with an appropriate level of private patient hospital cover) against the amount of Medicare Levy Surcharge (an additional tax) you would be liable to pay.

In certain cases, it is possible that the Medicare Levy Surcharge turns out to be less than the cost of private health insurance.

I am over 30 years old. Do I need private health insurance?

This is another area of confusion amongst taxpayers and a common question we’re asked.

For tax purposes, age 31 is irrelevant. If you are 31 and your income is under the threshold for Medicare Levy Surcharge purposes, you do not need private health insurance for tax purposes.

Irrespective of your age, if your income is over the Medicare Levy Surcharge threshold you will be charged the  Medicare Levy Surcharge. If your income is less than the Medicare Levy Surcharge threshold, at any age, you will not be charged the Medicare Levy Surcharge.

So why is age 31 important?

For individuals approaching the age of 30 but still under 31, this timeframe holds significant importance when considering the purchase of private health insurance due to the concept of Lifetime Health Cover Loading (LHC Loading).

In 2000, the Australian government introduced the Lifetime Health Cover program as a means of incentivising Australians to purchase private hospital insurance, thus alleviating pressure on the public healthcare system.

The mechanism employed to encourage younger individuals to acquire private hospital insurance involved the introduction of loading. Here's how it operates:

If you get appropriate private health insurance before turning 31 and maintain the coverage for ten years, you be charged any LHC loading.

However, you choose not to purchase appropriate private health insurance before the age of 31 and decide to buy it later, you will incur a loading surcharge. This surcharge amounts to an additional two percent of your hospital premium for each year you surpass the age of 30, based on your age as of the preceding July 1st before joining.

The maximum loading percentage that can be applied is 70 percent. Once you maintain your private hospital cover for a continuous period of ten years, the loading surcharge ceases, and you only pay the standard premium.

It is really important to consider this information when nearing the age of 30 to make an informed decision regarding private health insurance, taking into account the potential implications of Lifetime Health Cover Loading and what your future income (and family income) might look like.

Do my spouse and I need private health insurance?

If your income for Medicare Levy Surcharge purposes is above the threshold and your goal is to eliminate being charged the Medicare Levy Surcharge (extra tax) then you and all of your dependants (children) must be covered by an appropriate level of private patient hospital cover.

It’s important that your policy meets this requirement of you and your spouse will still be liable for Medicare Levy Surcharge - even if one of you had an appropriate level of private patient hospital cover.

Children are considered to be dependent if they are:

  • Under 21 years old; or
  • Aged 21 to 24 years old and studying full-time at school, college or university.

To be an appropriate level of cover, couples or families must have an excess of $1,500 or less.

I have ‘extras’ private health insurance cover - is that enough?

No. Extras cover is not regarded as an appropriate level of private patient hospital cover. It might be beneficial for you to have extras cover, but it isn't considered appropriate cover for Medicare Levy Surcharge purposes.

I have an overseas health insurance policy - does that count?

No. The government will not consider health insurance cover provided by an overseas fund. The private health insurer must be an Australian Registered Health Insurer.

Potential Benefits of Private Health Insurance

Private health insurance is a personal choice that goes beyond just minimizing tax for taxpayers who may be impacted by the Medicare Levy Surcharge. The decision to have private health insurance is influenced by various factors, including individual circumstances, preferences, and healthcare needs. While private health insurance can help mitigate the surcharge for those affected, it offers a broader range of benefits and considerations.

Personal Circumstances:

Considerations for private health insurance extend beyond tax implications. Individual circumstances, such as age, health conditions, and family composition, play a significant role in the decision-making process. For instance, individuals with specific medical needs or those who prefer greater control over their healthcare choices may find private health insurance beneficial.

Healthcare Preferences:

Private health insurance provides additional flexibility and options in terms of healthcare preferences. It allows individuals to select their preferred doctors, specialists, and hospitals, providing a more personalised and tailored approach to healthcare. This level of choice and control can be particularly important for individuals with specific healthcare requirements or those seeking expedited access to services.

Comprehensive Coverage:

Private health insurance offers coverage for a wide range of healthcare services and treatments beyond what is covered by the public healthcare system. This may include services like dental care, optical treatments, physiotherapy, and alternative therapies. It provides peace of mind knowing that individuals have additional financial protection and access to a broader scope of healthcare.

Financial Considerations:

The affordability of private health insurance is an important factor to consider. Insurance premiums vary based on factors such as level of coverage, age, and health status. It's crucial to evaluate individual financial capacity and budget to determine if private health insurance aligns with personal affordability and priorities.

Ultimately, private health insurance serves as a personal choice that extends beyond tax minimisation, providing comprehensive healthcare options tailored to individual circumstances.

Please note that the information provided in this blog post is for general guidance and should not be considered professional financial or tax advice. It's recommended to seek advice from a qualified professional regarding your specific situation. Please contact our office on (03) 9746 6479 for tax advice suitable to your circumstances.