With the rising cost of living, some Australians consider cancelling or reducing their private health insurance to save money. However, doing so may increase the amount of tax you pay at tax time due to the Medicare Levy Surcharge (MLS).
The Medicare Levy Surcharge is an additional tax applied to higher-income earners who do not hold an appropriate level of private hospital cover.
If your income exceeds certain thresholds and you do not have eligible private hospital insurance, you may be required to pay the surcharge when you lodge your tax return.
What Is the Medicare Levy Surcharge?
The Medicare Levy Surcharge (MLS) is designed to encourage higher-income earners to take out private hospital cover and help reduce demand on the public healthcare system.
Depending on your income level, the surcharge can add between 1% and 1.5% of your taxable income to your tax bill.
For many taxpayers, this additional cost can be significant if they are unaware of the rules before cancelling their health insurance.
How Is Income Calculated for the Medicare Levy Surcharge?
A common misconception is that the Medicare Levy Surcharge is calculated only on your taxable income. In reality, the ATO uses income for surcharge purposes, which includes several additional components.
Income for MLS purposes may include:
• Your taxable income
• Certain salary sacrifice amounts
• Reportable fringe benefits
• Net investment losses
• Certain superannuation contributions
• Your partner’s income for surcharge purposes
Because these additional amounts are included, your MLS income may be higher than expected, which could result in additional tax at the end of the financial year.
Should You Cancel Your Private Health Insurance?
Before cancelling or downgrading your private health insurance, it is important to understand how the Medicare Levy Surcharge may affect your overall tax position.
In some cases, the surcharge may cost more than maintaining an appropriate level of private hospital cover.
Reviewing your income and potential tax obligations in advance can help you make a more informed financial decision.
You can read more about the Medicare Levy Surcharge on the Australian Taxation Office website
Need Advice?
If you are considering cancelling your private health insurance and would like to understand the potential tax implications, the team at Pisani Group can help you review your situation and ensure you remain compliant with ATO requirements.
