Do you understand the interaction between private health insurance and the tax you pay?
The choice to purchase or abstain from private health insurance can have significant tax implications. Follow three taxpayers to understand how to avoid unexpectedly owing additional tax yourself.
Penelope: The high income earner
Nathan: The UK expat
Tiffany: The expat turned permanent resident
Recently-legislated changes to the low and middle income tax offset have many taxpayers enjoying an unexpected refund, but for others, the surprise in their Notice of Assessment (NOA) hasn’t been as positive.
For many, the source of their additional tax is the complex system of private health insurance and the corresponding impact to individual income tax in Australia.
In Australia, each taxpayer pays the Medicare Levy of 2 percent to contribute to our public health care system. This is withheld by your employer or, for investment income, paid upon lodging a tax return. Unfortunately the simplicity of the system stops here for many people.
In the following sections we follow the tax implications that should be considered for three typical unsuspecting taxpayers to understand how you can prevent an unplanned tax bill from the Australian Taxation Office (ATO).
Penelope: The high income earner
Penelope is a single mother and earns $200,000 a year. The ATO considers her a family. As her income is greater than $180,000, she falls into the top rate of income tax (45 percent).
Penelope has only reached the top in 2019 due to a well-deserved promotion and hadn’t taken out private health insurance in the past because she felt the public system was good enough.
Surprise: Penelope completes her 2019 tax return to find that she is now being assessed with the Medicare Levy Surcharge (MLS) of 1 percent, for not having sufficient private health insurance.
The MLS is calculated at the rate of 1 percent to 1.5 percent of your income.
Lesson learned: Penelope expects more promotions and increasing income in the future and decides that the cost of MLS ($2,000) exceeds the price of getting basic hospital cover that exempts her from the surcharge.
But don’t forget: When Penelope signed up for private health cover she accepted the maximum 25 percent government rebate offered. While this reduced her premiums due each month, her income level as a single parent family only left her with a rebate entitlement of 16.7 percent. She chooses to adjust her rebate level and ensure that she doesn’t owe tax in 2020 as the ATO actively audit the rebate to ensure no one is over-claiming.
Nathan: The UK expat
Nathan arrived in Australia from the United Kingdom (UK) in 2018 and is enjoying the Sydney surf lifestyle for a couple of years. His employer has provided him with coverage on its global health plan which also meets his visa requirements.
Nathan is single and his taxable income is $100,000. His assessment arrives from the ATO, but he is disappointed to see that he owes money despite having health insurance. But why?
Australia has a reciprocal health care agreement (RHCA) with the UK which enables Nathan to access the Australian Medicare system. Nathan never picked up a Medicare card and always uses his insurance. He assumed he wouldn’t need to worry about the Medicare Levy or Surcharge. Nathan’s employer withholds the 2 percent levy (as it does on a default basis for all employees) but Nathan earns more than 90,000 and therefore is subject to the MLS.
Nathan has insurance, so why has he been hit with a $1,000 MLS liability?
The devil is in the detail: Nathan’s global health insurance plan is not a complying fund for MLS purposes and therefore doesn’t provide an exemption. In fact, if Nathan went into the local health insurance shopfront and purchased a plan he would have to tell them he was from the UK and therefore needs a plan with a complying Australian health fund, suitable for expats from RHCA countries.
Nathan is now faced with the cost versus benefit analysis between taking out the additional Australian health insurance or paying the MLS.
Tiffany: The Argentinian expat turned permanent resident
Tiffany is a native of Buenos Aires who loved her assignment to Melbourne so much she decided to make Australia her forever home. 2019 is her first tax return since she lodged her application for permanent residency in late 2018.
Another surprise; Tiffany’s 2019 return is audited and the ATO decides that she is liable for the Medicare Levy from the date she applied for permanent residency (PR). This is on the basis that she can access the Medicare system from PR application date.
Tiffany earns more than $180,000 and also has to pay a hefty 1.5 percent MLS. This is a big change compared to her exemption from the Levy and MLS in prior years.
Lifetime Health Cover (LHC): Did you know there is a 2 percent loading on top of the insurance premium for every year you are aged over 30 and did not have private health cover?
Recent migrants can avoid the loading by taking on private cover with a complying Australian insurer by the later of:
- 1 July following their 31st birthday; or
- 1st anniversary of their full (RHCA cover doesn’t count) Medicare registration.
Tiffany is 40 and applied for PR in December 2018. In August 2019, Tiffany is still able to obtain private health insurance without paying the LHC loading. If Tiffany didn’t take out health cover until January 2020, it could have cost her a 20 percent LHC loading (2 percent per year x 10 years over age 30) on top of her normal health insurance premium.
The increased premiums due to LHC loading stop after 10 years of continuous private hospital cover.
What have we gained from the experiences of Penelope, Nathan and Tiffany?
With higher levels of income there are more tax dollars at stake where private health cover is insufficient. Seek tax advice if you need help navigating the numerous pitfalls that can easily steal that refund you already spent in your beach daydreams.