Emergency

For some time the Federal Government has sought to ‘means test’ the private health insurance rebate and base increases to the Medicare Levy Surcharge on taxable income.  The legislation to enact these measures were passed by Federal Parliament on 15 March 2012.

The changes mean that the amount of rebate available is dependent on an income test for individuals and families (thresholds are doubled for families). The changes will apply from 1 July 2012 and will introduce three new “Private Health Insurance Incentive Tiers”.  The tiers start to reduce the rebate from $84,000, phasing it out to nil at $130,000.

Further, the rate of the Medicare Levy Surcharge for individuals and families without private hospital cover will increase based on their level of income.  The Surcharge commences at 1 per cent at income of $84,000, increasing to a maximum of 1.5 per cent when income is over $130,000.

The followingtable details how these changes will operate:

                                                                                                             

Tier

Income ($)

Private health insurance rebate (%)

Medicare Levy Surcharge (%)

  Singles

Families

Under 65 years-old 65 - 69 years-old 70 years or over  
  0 - 84,000 0 - 168,000 30 35 40 Nil
1 84,001 - 97,000 168,001 - 194,000 20 25 30 1
2 97,001 - 130,000 194,001 - 260,000 10 15 20 1.25
3 130,001+ 260,001+ 0 0 0 1.5

 

For families with more than one dependent child, the relevant threshold is increased by $1,500 for each child after the first, which is currently the case.

The definition of income for these purposes is on the same basis as applies for the Medicare Levy Surcharge, which is:

  • taxable income; plus
  • reportable fringe benefits; plus
  • total net investment losses; plus
  • reportable super contributions; less
  • where the person is aged 55 and 59-years-old, any taxed element of a lump sum superannuation benefit received, other than a death benefit, does not exceed their low rate cap.

The decision of whether to take private health insurance cover is a personal one, likely based on the costs and benefits of that cover in that particular person’s circumstances. Clearly, both the private health insurance rebate and the Medicare Levy Surcharge impact on the effective cost of private health insurance cover.

Therefore, these changes will likely impact on the effective cost of private health insurance cover for a significant number of taxpayers and their families. This change in effective cost may not ultimately impact on the decision of whether to take private health cover.

However, in some cases it may be that any increase in the effective cost of the cover, through a reduction in the available rebate, may result in a decision to no longer take private health insurance cover, even after factoring in any impact from the Medicare Levy Surcharge.

Conversely, in some cases the increase in the Medicare Levy Surcharge may result in a decision to now take out private health insurance cover in order to avoid the liability of that Levy, even after allowing for any available reduction in the rebate.

The private health insurance rebate can be claimed as a reduction in the premium paid. Alternatively, where the full premium is paid it can be claimed as a cash refund via Medicare or on lodgement of the income tax return.

It is anticipated that information will be soon made available on how to claim the private health insurance rebate; particularly in the case of small business owners who may not be as able to estimate their taxable income each year as a taxpayer solely in receipt of salary income.

The following examples are adapted from the Bills.

Example 1

John is a single 38-year-old with a complying health insurance policy.  In the 2013 financial year his income as defined is $101,000.

From 1 July 2012 John would be assessed as a Tier 2 single income earner and, based on the above table,would receive a 10 per cent private health insurance rebate.

Example 2

Married couple David (aged 45) and Erin (aged 47) have two children, Kate (aged 14) and Alex (aged 10); they have family private insurance cover.  In the 2013 financial year David’s income as defined is $120,000 and Erin’s is $50,000. Therefore, their combined income for Medicare Levy Surcharge purposes is $170,000.

From 1 July 2012 David and Erin would be assessed as Tier 1 family income earners and based on the above tablewould receive a 20 per cent private health insurance rebate.

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