Understanding the Medicare levy and Medicare levy surcharge

Navigating the Australian tax system can be challenging, especially when it comes to understanding the Medicare levy and the Medicare levy surcharge. Let’s break these down to help you understand who pays them and how private health insurance affects your tax return.

Medicare levy
The Medicare levy is a compulsory charge that helps fund Australia’s public healthcare system. Almost all Australian taxpayers pay this levy, which is 2% of your taxable income. This levy’s generally withheld from your pay by your employer throughout the year, so you may not notice it until tax time.

It’s important to note that having private health insurance doesn’t exempt you from paying the Medicare levy; it only affects your liability for the Medicare levy surcharge.

In certain cases, you might be eligible for a reduction or exemption from the Medicare levy. For instance, if you meet specific conditions such as being a low income earner, foreign resident or having a medical exemption, you may qualify for a reduced rate or full exemption.

Medicare levy surcharge
The Medicare levy surcharge (MLS) is an additional charge designed to encourage higher-income earners to take out private hospital insurance, thereby reducing the strain on the public healthcare system. Unlike the Medicare levy, the MLS isn’t automatically withheld from your income, but is calculated when you lodge your tax return.

You may be liable for the MLS if your income exceeds the MLS threshold and you, your spouse or your dependent children don’t have an appropriate level of private patient hospital cover for the entire income year. The surcharge rates vary based on your income tier.

Income for MLS purposes
Your income for MLS purposes includes several components beyond your taxable income, such as reportable fringe benefits, total net investment losses and reportable super contributions. If you have a spouse, their income’s also considered in the calculation.

For the 2024–25 income year, the MLS income thresholds and rates of MLS are:

Singles

Base tier: $97,000 or less (0% MLS);
tier 1: $97,001–$113,000 (1% MLS);
Tier 2: $113,001–$151,000 (1.25% MLS);
Tier 3: $151,001 or more (1.5% MLS).

Families

Base tier: $194,000 or less (0% MLS);
Tier 1: $194,001–$226,000 (1% MLS);
Tier 2: $226,001–$302,000 (1.25% MLS);
Tier 3: $302,001 or more (1.5% MLS).

The family threshold increases by $1,500 for each dependent child after the first.

Private health insurance
To avoid the MLS, you need an appropriate level of private patient hospital cover. For singles, this means a policy with an excess of $750 or less, and couples or families need a policy with an excess of $1,500 or less. Your policy must cover you, your spouse and all dependants for the full income year to avoid the surcharge.

Keep in mind that extras-only cover (such as for dental or optical) and travel insurance don’t qualify as private patient hospital cover for MLS purposes.

Next practical steps

Review your income: Regularly assess your income to determine whether you’ll be required to pay the MLS. The ATO provides a useful income tests calculator.
Evaluate your insurance: Consider whether taking out private health insurance is beneficial for you. If your income’s above the MLS threshold, having the appropriate cover can save you money.
Understand your policy: Make sure your private health insurance policy meets the requirements to avoid the MLS – check the excesses and ensure it covers all necessary family members.
Consult a professional: If you’re unsure about your obligations or the best course of action, consult a tax professional or financial advisor, who can provide tailored advice for your circumstances.
Stay informed: Tax regulations and thresholds can change, so it’s important to stay updated on any adjustments that might affect your obligations.