Medicare levy and Medicare levy surcharge: What’s the difference?
The Medicare Levy and the Medicare Levy Surcharge can be a source of confusion as they are two very similarly-sounding taxes. However, they are completely different levies.
One is a compulsory tax for most Australians that partly funds Australia’s public health system known as Medicare, and the other is an additional tax for certain groups of people that do not have private health insurance in Australia. Let’s break this down:
What is the Medicare levy?
The Medicare levy is a simple 2% tax that the majority of Australian citizens are required to pay as their contribution to the country’s public health system called Medicare. This tax goes toward free or subsidised medical treatment, public hospitals, doctors, as well as prescription costs.
All Australian and New Zealand citizens, those who have applied for or hold an Australian permanent residency, as well as those covered by a Reciprocal Health Care Agreement with another country are eligible to use the country’s public health system.
The vast majority of those that fall under these groups are liable to pay the 2% tax, although not everyone in Australia pays the Medicare Levy. Here’s who does:
Who pays the Medicare levy?
In 2018-2019, an individual earning $27,997 or more per year pays the Medicare levy at 2% of his/her total taxable income.
Individuals whose total taxable income sits between $22,398 and $27,997 only pay a partial amount of the levy.
This tax is in addition to the regular income taxes. Obviously, this means the higher you earn, the more you contribute to the Medicare levy.
How do I pay the Medicare levy?
Generally, this tax is deducted using the Pay As You Go (PAYG) system where your employer retains an amount from your salary or wages to cover the levy. In most cases, that should be sufficient to cover your Medicare levy obligation. However, if you want to be sure that the correct amount is being deducted; you can refer to these withholding tables to compare against your payroll.
The actual amount you pay is calculated by the Australian Taxation Office (ATO) when you lodge your income tax return. To calculate an estimate of your Medicare levy, you can use this calculator which requires you to input your total taxable income as well as some information regarding your circumstances.
Who is exempt from paying the Medicare levy?
Although almost everyone who earns in Australia contributes to the Medicare levy, there are those that qualify for a reduction or exemption on this tax.
For the most part, if a person’s taxable income does not exceed a certain threshold amount; they can apply for a Medicare levy exemption. The threshold amount for 2018/19 is $22,398 for individuals other than certain pensioners.
If a person’s taxable income falls between the lower and upper income threshold of $22,299 and $27,997, they pay a reduced Medicare levy of 10% of earnings over $22,398.
The same rule above applies to seniors and pensioners who qualify for a seniors and pensioners tax offset. The income threshold for this demographic is between $34,244 and $42,805.
Additional requirements that affect your eligibility for the Medicare reduction and exemption vary depending on your marital status and whether you have any dependents.
In 2018-2019, you may be eligible to apply for a full or half Medicare Levy exemption if you:
- Earn $22,398 or less
- Are not entitled to Medicare benefits
- Were a temporary resident (e.g. visa 457)
- Did not hold Australian residency for the entire duration of 2018-2019
- Are a blind pensioner
- Receive sick allowance from Centrelink
- Are entitled to receive full free medical treatment for all conditions under Veteran’s Affairs Repatriation Health Gold Card.
- Are a foreign resident without any dependents or have dependents that are also entitled to a Medicare levy exemption.
- Members of the Australian Defence Force who are entitled to full medical treatment in their own right.
To see the full list of Medicare levy reductions and exemptions visit the ATO Medicare Levy Reduction or Exemption 2019.
How to avoid paying the Medicare levy
The Medicare levy can’t be avoided unless your earnings in the last financial year amounted to less than $22,398.
What is the Medicare levy surcharge (MLS)?
The Medicare Levy Surcharge is an additional tax introduced by the Australian Federal Government to incentivise Australians to purchase private health insurance. When more people have private health cover, less strain is placed on the public health system, meaning better health care for everyone.
The rate of the Medicare Levy Surcharge you are required to pay differs from your taxable income and is only levied on Australian citizens who earn above a certain income threshold and do not have an appropriate level of private hospital cover. The Australian Taxation Office uses a special definition to calculate this, called income for MLS purposes. This includes your taxable income, total reportable fringe benefits, and any family trust distribution tax you’ve paid. If you are liable to pay the Medicare Levy Surcharge, you will be paying 1%, 1.25%, or 1.5% of your total MLS taxable income.
Who pays the Medicare levy surcharge?
From 2018-2019 you may be liable to pay the MLS if you identify:
- As a single person, you earn over $90,000
- As a couple or family, you jointly earn over $180,000
- As an Australian national and/or hold Permanent Residency
- With not having purchased an appropriate level of private patient hospital cover
Who is exempt from paying the Medicare levy surcharge?
The Medicare Levy Surcharge does not apply to you if:
- As a single person, you earn less than $90,000
- As a couple or family, you earn less than $180,000
- Your total family income exceeds $180,000 but you earn less than $22,398
- You have a private patient hospital policy with a registered Australian health fund
- You are not an Australian citizen and/or do not have Permanent Residency.
How to avoid paying the Medicare levy surcharge
To avoid paying this additional tax, you simply need to purchase a private patient hospital policy with an Australian registered health fund. Even if you purchase the most basic hospital policy, it is likely that you’ll spend less on the policy than you would in taxes.
You can expect to pay around $85-$110 for a basic hospital policy. If your MLS taxable income amounts to $90,000, you’ll be taxed at a rate of 1% of that total. This means you’ll be handing out $900 in additional taxes: that’s a lot of change. If you diverted that money into purchasing private hospital cover, not only will you avoid paying the Medicare Levy Surcharge, you will also have hospital cover to offer you extra security for the days that you need inpatient hospital care.
How we can help you avoid the Medicare levy surcharge and save money
There are ways that you can save even more money, and we can help. Here at Health Deal, we assist you in finding the best health insurance policy for you in Australia, in addition to advising you on how to avoid paying the Medicare Levy Surcharge. It doesn’t matter which health fund on our panel you choose, so long as it benefits you and your family and helps you save your hard-earned dollars. Take the first step and compare your cover below