Tax treatment of Australian Private Health Coverage
Private health Insurance (PHI) has received generous tax treatment in Australia for the past 15 years. But belt-tightening begun by the previous Labor administration a couple of years ago is continuing under the new conservative coalition.
So now it is time to review the present situation with a view to making tax-planning decisions about health-care insurance going forward.
Recent Changes to Australia Health Insurance Taxation
|*Jan 2012||Income cap for full PHI subsidies is set at A$84,000|
|*Jan 2013||Tax rebate is abolished for lifetime health cover (LHC) loading|
|*Apr 2014||Annual increases in PHI rebate are linked to CPI rises|
|*May 2014||Income thresholds for PHI and MLS are frozen for 3 years from mid-2015|
|*Jul 2014||Medicare levy rises to 2% to fund disability insurance scheme|
Since 1999 the Australian government has offered generous tax incentives to taxpayers taking out private health insurance policies. That in turn helps defray some of the costs of administering Australia’s universal government-run health-care system, Medicare. All Australians are covered by Medicare, which was established in 1975 under the name “Medibank”. Up until recently, Medicare was funded by a 1.5% tax levy on all Australians but that levy has since risen to 2%.
CURRENTLY: For low-income families (couples with no children) the levy does not kick in until they earn at least $45, 001 with an additional $4,132 for each dependent child.
But as costs rose, the Federal Government was forced into offering taxpayers financial incentives to take out private health coverage. So in 1999 two important changes were made to the way the Australian health-care system is taxed.
- The Medicare Levy Surcharge (MLS) – an additional Medicare tax – was introduced on Australian taxpayers above a certain income who did not have private hospital cover.
- The Private Health Insurance (PHI) rebate was introduced to lower health-insurance premium payments – through the tax system – for Australians in certain income groups.
Both changes have greatly increased the percentage of Australians covered by private health insurance. Today more than half of all Australians have private health insurance, one of the highest rates in the world.
To assess how much taxpayers benefit from the PHI rebate and how much they are penalized by the MLS, the Australian government sorts individuals and families into groupings (see Table). The lowest income grouping includes singles earning below $90,000 and families earning below $180,000. Single parents and couples, including de facto couples, fall into the “families” category and an additional amount is added for each subsequent child.
Table 1: Income levels used to calculate health-insurance tax treatment
|Standard||Tier 1||Tier 2||Tier 3|
*For families with children, the thresholds are increased by $1,500 for each child after the first.
The Private Health Insurance (PHI) rebate
The PHI rebate is paid either as a lump-sum tax refund or – more commonly – as a subsidy to lower health-insurance premiums. For singles and families at the Standard income tier, the subsidy is almost 30% but declines as income rises (see Table 2). Older Australians receive higher PHI rebates, with those over 70 receiving a rebate of almost 39% of their premium at the Standard income tier.
Table 2: PHI rebate levels by age and income grouping, 2017-18
|Standard||Tier 1||Tier 2||Tier 3|
The Medicare Levy Surcharge (MLS)
The MLS is levelled at all Australian taxpayers who earn more than A$90,000 and do not have private health insurance. It does not affect those in the Standard income tier but kicks in at 1% of taxable income for Tier 1 income groups. From there it rises to 1.25% for Tier 2 groups and then to 1.5% for Tier 3 groups. (see Graph).
Medicare Levy Surcharge (MLS) by income grouping
|Standard||Tier 1||Tier 2||Tier 3|
Lifetime Health Cover (LHC) Loading
LHC Loading is a health-care tax penalty Australians 31 years and older pay for their PHI premiums if they do not take out full hospital cover for the year. It was introduced in 2000 to encourage younger Australians to take out full, all-inclusive health insurance coverage.
From age 31 the penalty (called a “loading”) begins at 2% and accumulates by 2% for each year of non-coverage after that. In 2010 a change was made to remove the loading from people who had paid it for 10 consecutive years. <http://www.health.gov.au/internet/main/publishing.nsf/Content/health-phi-fact27.htm>
* Last year the PHI rebate was removed from the LHC loading charge component of PHI premiums. This meant that Australians already subject to the LHC loading would no longer receive tax relief in the form of PHI rebates on the loading, increasing their health-care tax burden.<http://www.privatehealth.gov.au/healthinsurance/incentivessurcharges/insurancerebate.htm>
* Earlier this year, the government made two important changes to PHI rebates and the MLS.
a) Pegging annual increases in the rebate to a formula based on changes in the Consumer Price Index (CPI) instead of health-insurance premiums. <http://www.independentaustralia.net/politics/politics-display/federal-budget-summary-2014-the-abbott-government-sets-its-agenda,6475> This has effectively reduced the PHI rebate percentage paid to the different income groupings and will restrict payment further in future. Annual PHI premium payment rises can now be expected to increase at a slightly higher rate.
b) Freezing the thresholds for the four income groupings at 2014 levels for the three years beginning in mid-2015. This means more Australians’ incomes will rise above the thresholds up to mid-2018, increasing their MLS payments and lowering their PHI premium payments.
Both moves are expected to help fix Medicare’s long-term funding problems while lowering the government’s commitment to financially supporting private health coverage in Australia.
Conclusion: Over the next few years, tax relief on private health coverage will decline for individuals and families. But reducing coverage for most middle-income earners is not usually a financial option.
What to do
*1) Check your tax returns
The MLS and the reduced PHI premiums kick in right at $90,000 for singles and $180,000 for couples. Since the median singles income in Australia is around $70,000-$75,000 <http://www.macrobusiness.com.au/2013/05/what-is-the-typical-australian-income-in-2013/>, most Australians fall into the “Standard” income category and receive the full tax benefits of buying PHI. Remember that single Australians still receive tax relief up to incomes of $140,000 – almost the top 5% of earners. But you need to check your tax returns to find out your actual taxable income.
*2) Avoid the $90,000 double whammy
A slight jump in earnings one year to above one of the income thresholds can quickly be offset by additional health care tax costs. If you rely only on Medicare, you get hit with the MLS.
*3) Buy full coverage before you turn 31
LHC loading means the government can hit you with an extra 2% annually for ten years on top of your regular premium for every year over 30 without full hospital coverage. Plus PHI rebates no longer cover it, so no more tax relief on the loading. If you’re 30 years old and have been getting by on bare-bones PHI coverage, consider upgrading soon. You’re about to start paying for it anyway.
*4) Shop around
Health funds in Australia are always tweaking their products to fit this unique marketplace. With 56% of the adult population here buying PHI every year, the market is large and active. Use search sites this one to compare prices and keep costs lower.
Medicare Levy Surcharge Calculator
Disclaimer: The above information is correct and current at the time of publication.
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