As the end of the financial year approaches, the Australian Taxation Office (ATO) is leaving a reminder of an important consideration that could save you a significant amount of money on your taxes.
According to the ATO, those with higher incomes must review their health insurance status to avoid the Medicare Levy Surcharge. The Medicare Levy Surcharge is designed to encourage individuals who earn above a certain threshold to take out private hospital cover, in addition to the standard Medicare Levy.
In the past, nearly half a million Australians have been caught out by this surcharge, paying it through their tax returns. The surcharge ranges from 1 to 1.5 per cent of your income and affects singles earning over $97,000 and families earning over $194,000 who do not have an appropriate level of hospital cover.
For someone earning the average full-time income of $100,016, the surcharge would be 1 per cent, equating to an extra $1,000.16 in tax if they did not have private health insurance. For a family with two people earning the average full-time income, the combined surcharge would be a hefty $2,000.32.
Mark Chapman, the director of tax communications at H&R Block, advises that taking out a private health policy early in the tax year can save you from the surcharge for the remainder of that year.
However, he also notes that the definition of income for the surcharge includes not just your taxable income but also ‘reportable fringe benefits, reportable super contributions, and any investment losses, such as those from negative gearing.’
The Medicare Levy Surcharge income thresholds for the 2024-25 financial year are as follows:
| Tier 1 | Tier 2 | Tier 3 | |
| Single | $97,001 – $113,000 | $113,001 – $151,000 | Over $151,001 |
| Family | $194,001 – $226,000 | $226,001 – $302,000 | Over $302,001 |
| Surcharge | 1.0% | 1.25% | 1.5% |
Chapman emphasises that there is no one-size-fits-all answer when it comes to deciding whether to take out private health coverage.
‘Obviously, private health insurance is quite expensive and the Medicare Levy Surcharge is quite expensive, so there is not an easy option. It depends on the quote you have been given by the health fund provider and it depends on whether you think you are likely to have something that will require you to claim,’ Chapman told Yahoo Finance.
According to Canstar, the average annual cost of hospital and extras health insurance for those between 36 and 59 is $3,764, as compared to those under 36 which cost a bit less at $3,261.
Meanwhile, hospital-only coverage is $2,896 on average for those between 36 and 59, and $2,341 for those under 36.
Another factor to consider is the Lifetime Health Cover (LHC) loading. Chapman explains, ‘Ideally, you should take it out before you reach the age of 31, if you take it out afterwards there might be an additional loading on the premiums you pay, which can be quite expensive because it is 2 per cent per year.’
The message is clear: the earlier you take out private health insurance, the better, says Chapman. Not only can it save you from the Medicare Levy Surcharge, but it can also prevent the LHC loading from inflating your premiums.
As we navigate the complexities of tax and health insurance, it is essential to stay informed and make decisions that align with our financial and health needs.
We would love to hear from our YourLifeChoices readers. What are your thoughts on balancing the cost of private health insurance with potential tax savings? Share your experiences and insights in the comments below.
Also read: Here’s why ignoring a phone call from ATO could be costly
