The Australian Tax Office (ATO) defines the Medicare Levy Surcharge (MLS) as an additional tax that is placed onto top of a person’s income. Taxpayers are required to pay the MLS if their income is above a certain level and you don’t have an appropriate level of hospital cover as part of a private health insurance policy. 

The purpose of the MLS is to motivate higher income earners to use the private hospital system to reduce demand on the public system. 

The requirement for taxpayers having to pay the MLS could have the potential to seriously impact your savings account when it comes to tax time if you haven’t signed up to receive private health insurance.

The MLS was established in 1997 by the Australian Government to serve a purpose of reducing demand on the public Medicare system and comes in the form of a tax penalty for Australians who do not have private hospital cover but earn over a certain amount of taxable income.

It is important to be aware that there some key differences between the Medicare Levy and the MLS.

The Medicare Levy is compulsory for every Australian taxpayer and demands two percent of an individual’s annual income (with some exceptions). The money paid via the Medicare Level is used to fund Medicare.

Although the large majority of Australians can’t avoid paying the Medicare Levy, there are a few things private health insurance to reduce amount you pay for the MLS and consequence earn some tax savings.

The total amount each person is required to pay on the MLS will vary on a case-by-case basis as it is influenced by how much money each person earns. The total amount you have to pay is not just based on how much your employers pays you but also on any fringe benefits you receive, the net amount on which family trust distribution tax has been paid and many other factors.

The MLS is broken up into two income thresholds the first being “single” and the second being “family” which increases across four income tiers. The required payment for MLS commences when a single person earns more than $90,000 or a family’s combined taxable income more than $180,000. For families who have two or more dependent children, the family income threshold is increased by $1500 each after the first one.

All of this means that if you are in tiers one, two or three and haven’t had adequate private hospital cover during the current tax year, you might end up having to pay significantly more money at tax time.

If the thought of having to pay the MLS is something that bothers you and you are thinking about making yourself eligible for a basic health insurance policy before the end of the financial year to avoid paying the MLS, you need to keep a few important things in mind.

It is important to understand that if you have only held hospital cover for part of the financial year you only have be granted a partial exemption from the MLS. This means you will be required to pay the surcharge for all the days you did not have private hospital cover, this means that going out and signing up at the last minute might not strategically be a good idea.

This is also true for temporary suspensions on existing private health cover. If you suspended payments to your health insurer to travel overseas, for example, you will also be required to pay the MLS for the days you suspended your policy.

When deciding whether to invest in hospital cover or keep paying the MLS it is important to keep in mind that not all basic private health insurance policies have been created equal and there are some policies that you might not be eligible to sign up to. For example, extra only cover would not make the cut and you might be able to find more valuable hospital cover by going for a higher cover option with a “Bronze” or “Silver” policy instead of getting “Basic Cover”.

Make sure you take the time to avoid rushing in and signing up quickly as it would be wise to look around to make sure that the policy you eventually selection is appropriate and will leave you in a better financial position than it would find yourself in if you were to pay the MLS at the end of the financial year.

Furthermore, to avoid paying the MLS singles must be signed up to a hospital cover policy with an excess of $750 or less. For couples or families, you must be signed up to a hospital cover policy that has an excess of $1,500 or less.

It is also important to understand that ‘extras’, such as optical, dental, physiotherapy or chiropractic treatment, doesn’t count as private patient hospital cover.   This means that purchasing cover for these items only will not exempt you from the surcharge.

Taxpayers will be deemed exempt from paying some or all of the MLS if they;

  • Aren’t entitled to Medicare benefits
  • Are a foreign resident for tax purposes
  • Are a blind pensioner
  • Have obtained sickness allowance from Centrelink
  • Can claim medical treatment on a Veterans’ Affairs Repatriation Health Card or through defence force arrangements.