How Does Private Health Insurance Affect My Tax Return?
Overview
When it comes to health insurance and tax in Australia, there’s a lot of confusing jargon to wrap your head around. What is the Medicare Levy Surcharge and do you need to pay it? How can the health insurance rebate affect your tax refund?
This guide simplifies health insurance and tax, including how your private health cover can help you save some dollars at tax time.
Key Points
The Australian Government has several initiatives in place to encourage people to get private health cover.
If you don’t have private health cover and earn more than $93,000 as a single person, or $186,000 as a family, you must pay an additional 1-1.5% tax (this is known as the Medicare Levy Surcharge or MLS).
With the private health insurance rebate, you could get a partial refund on your health insurance premiums at tax time.
How does private health insurance affect my tax bill?
To help ease the burden on our public healthcare system, the Australian Government has several initiatives in place to encourage people to get private health cover. The three main ones are:
The private health insurance rebate
The Medicare Levy Surcharge (MLS)
The Lifetime Health Cover (LHC) loading
Each of these can affect your tax bill and insurance premiums in different ways. The result is that you can end up getting a bigger tax refund by having health cover, paying more tax if you don’t, or paying higher insurance premiums the longer you wait to get health cover.
What is the private health insurance rebate?
The private health insurance rebate is essentially a partial refund or discount the government gives you on your health insurance premiums. Think of it as a reward for having private health cover.
If you’re eligible, you can get the private health insurance rebate on hospital cover, extras cover, or both.
The rebate is income-tested, which means the amount you get back depends on how much you earn.
Rebate rates for singles for the 2023/2024 financial year:
| Income for the 2022/2023 financial year | Age < 65 | Age 65-69 | Age 70+ |
Base Tier | $93,000 or less | 24.608% | 28.710% | 32.812% |
Tier 1 | $93,001-$108,000 | 16.405% | 20.507% | 24.608% |
Tier 2 | $108,001-$144,000 | 8.202% | 12.303% | 16.405% |
Tier 3 | $144,001 or more | 0% | 0% | 0% |
Rebate rates for couples, families and single parent families for the 2022/2023 financial year:
| Combined income for the 2022/2023 financial year | Age < 65 | Age 65-69 | Age 70+ |
Base Tier | $186,000 or less | 24.608% | 28.710% | 32.812% |
Tier 1 | $186,001-$210,000 | 16.405% | 20.507% | 24.608% |
Tier 2 | $216,001-$288,000 | 8.202% | 12.303% | 16.405% |
Tier 3 | $288,001 or more | 0% | 0% | 0% |
Source: ATO
Find out how much your rebate would be with our health insurance rebate calculator.
How do I claim the private health insurance rebate?
There are two ways you can get your private health insurance rebate:
It’s paid directly to your health fund, giving you an upfront discount on your premium.
It’s paid through your tax return, as a discount on your income tax.
If you want to claim the rebate as a discount on your insurance premiums, you’ll need to give your health fund your estimated income so they can calculate the upfront discount for you. Alternatively, you can claim the rebate as a refund when you lodge your tax return.
What is the Medicare Levy Surcharge (MLS)?
The Medicare Levy Surcharge is a percentage of your income that’s payable to the ATO when you lodge your tax return. It was introduced by the Australian Government to encourage high income earners to get private health insurance.
You’ll need to pay the MLS if you don’t have private health cover and earn more than $93,000 as a single person, or $186,000 as a family (including couples and single-parent households).
The rate charged is between 1% and 1.5% of your income, depending on how much you earn.
MLS income thresholds and rates for 2022-23:
Threshold | Base Tier | Tier 1 | Tier 2 | Tier 3 |
Single Threshold | $90,000 or less | $90,001 - $105,000 | $105,001 - $140,000 | $140,001 or more |
Family Threshold | $180,000 or less | $180,001 - $210,000 | $210,001 - $280,000 | $280,001 or more |
Medicare Levy Surcharge | 0% | 1% | 1.25% | 1.5% |
Source: ATO
What’s the difference between the Medicare Levy and the Medicare Levy Surcharge (MLS)?
The Medicare Levy Surcharge is payable by people who earn more than the MLS threshold and don’t have private hospital cover.
The Medicare Levy is payable by most Australian taxpayers, regardless of whether or not you have private health insurance. It’s 2% of your taxable income, in addition to the tax you pay on your taxable income.
You don’t have to pay the Medicare Levy if you earn less than $23,365 (or $38,365 for seniors and pensioners).
If you’re eligible to be charged the MLS, you’ll need to pay it in addition to the Medicare Levy. This means that without private health cover, you could be paying an extra 3.5% of your income in tax every year.
What is the minimum level of health insurance required to avoid the MLS?
To avoid paying the MLS, you’ll need health insurance that includes:
Private patient hospital cover
A maximum excess of $750 for singles and $1,500 for couples or families
Generally speaking, having a basic tier of private hospital cover is enough to avoid paying the MLS.
Keep in mind, though, that this level of cover might not offer all the benefits you’re looking for. That’s why it’s a good idea to compare different levels of cover from different health funds to find the one that fits your specific needs.
COMPARE & SAVEWhat is Lifetime Health Cover (LHC) loading?
Lifetime Health Cover (LHC) loading is a government initiative intended to encourage Aussies to get private hospital cover earlier in life. Although not directly related to tax, it’s an important consideration if you’re weighing up whether or not to get health insurance.
If you don't get hospital cover before 1st July following your 31st birthday, you'll pay a 2% Lifetime Health Cover 'loading' on hospital cover.
This means a 2% additional cost is added to your hospital cover premiums for every year you go without cover.
For example, if you wait until you’re 40 to get hospital cover, you’ll be looking at paying an additional 18% on your premium.
Loading is capped at 70% and stops after 10 years of continuous hospital cover.
How to avoid Lifetime Health Cover (LHC) loading:
You can avoid paying the LHC loading by taking out hospital cover before 1st July following your 31st birthday.
If you're over 31, getting health insurance sooner rather than later can help you minimise the percentage of LHC loading you have to pay.
The government also allows ‘Days of Absence’, which means you can take a break from having hospital cover for a total of 1094 days, or switch policies, and still avoid the LHC loading.
Why get health insurance before tax time?
In short, it could help you save on your tax bill.
If you earn more than $93,000 as a single person, or $186,000 as a family, taking out hospital cover as a minimum can help you avoid the Medicare Levy Surcharge, as well as giving you access to the health insurance rebate.
You can compare policies side-by-side to find a level of cover that suits your needs and helps you save at tax time. Ask our Compare Club specialists today.
COMPARE & SAVEThis guide is opinion only and should not be taken as medical or financial advice. Check with a financial professional before making any decisions.
