Medicare levy, Medicare levy surcharge, private health insurance rebate, and medical expense deductions finally explained

Over the past year many people have been turning to Billings and Ellis for expert advice on the confusing interaction between the Medicare levy, the Medicare levy surcharge, private health insurance rebates and the ability to claim the medical expense offset.

This article attempts to explain each of these topics in plain language so that you can more easily structure your affairs with tax minimisation in mind.

Medicare levy

The Medicare levy is a tax levied on most taxpayers at the rate of 2.0% of their taxable income. The Medicare levy is used to fund the Medicare scheme that gives Australian residents access to health care. There is a threshold where the medicare levy kicks in and is reduced for people on low incomes.

Medicare levy surcharge

The Medicare levy surcharge is a tax in addition to the Medicare levy. The rate is either 1%, 1.25% or 1.5% depending on your taxable income. However, the Medicare levy surcharge applies only to singles and families without an appropriate level of private health cover. The cost of the Medicare levy surcharge can be so high that it might represent much better value to take out private health insurance. If it costs roughly the same to have cover as it does to have no cover, the private health insurance alternative can deliver more in terms of benefit.

Private health insurance rebate

The private health insurance rebate is simply a reduction on the premium that you pay the insurer or it can be claimed directly in your tax return as an offset. The rebate is effectively paid for you by the government. However, the rebate is means tested. This means that if you have claimed the rebate upfront as a reduced premium, and when you lodge your tax return you exceed the means test, you may well have to pay back the rebate to the government in your tax return. This appears as a negative offset in your tax calculation and is a common query from clients.

Medical expense tax offset

Separate to the private health insurance rebate, but still part of the discussion, is the ability to claim an offset against your taxable income based on the amount of out-of-pocket medical costs incurred for you and your family during the financial year. Unfortunately the government is phasing this offset out. For the 2014 tax year, only those taxpayers who are above the threshold, and who claimed the offset in the 2013 year, can continue to claim the offset. This holds true for the 2015 tax year as well. After the 2015 tax year, the offset will no longer be available unless the medical expenses relate to disability aids, attendant care or aged care expenses, and these will eventually disappear on 1 July 2019.

Further clarification just a phone call away

Hopefully the foregoing explains the mechanics in a way that doesn’t make your eyes glaze over! Of course there are more details to consider, such as the specific tax thresholds. Please contact me at Billings and Ellis if you would like to delve deeper into the exciting world of Medicare levies and surcharges, private health insurance, or medical expense offsets! We promise it won’t hurt to optimise your taxation scenario with professional, personalised advice.