How Health Insurance can help employees avoid a large tax liability

Australian employees may have to pay the Australian Taxation Office (ATO) over $900 when they lodge their tax return if  they did not hold the right health insurance.

In this 7-step guide we help you understand how having appropriate health insurance can help you reduce a potential tax liability and be better off financially. 

1. Determine if you are single or in a family

You are in a family if you are married, in a de-facto relationship or have a child. Otherwise you are considered to be single.

2. Determine your income for Medicare Levy Surcharge (MLS) purposes

Your income for MLS purposes includes:

• Your taxable income
• Non-cash benefits paid to you by your employer (reportable fringe benefits), and
• Any amount on which family trust distribution tax has been paid (not so common).

If you are single then your taxable income is the amount you earn in the financial year (i.e. July to June). This includes amounts you: 

• Earn as an employee (excluding compulsory superannuation)
• Earn from a side hustle as a sole trader, and
• Other amounts you earn like dividends or interest

less any eligible tax deductions. Examples of eligible tax deductions may include working from homes expenses, travel expenses and tax agent fees to name a few. 

If you are in a family, then your taxable income for this purpose is the amount your family earns in the financial year less any tax deductions.

3. Determine if the MLS applies to you

There are two medicare levies. There is the standard medicare levy and in addition to that the Medicare Levy Surcharge (MLS). Most employees will pay the medicare levy, but you will also need to pay the MLS where you are:

• Single and your taxable income is over $90,000, or 
• In a family and your family’s taxable income is over $180,000

where your taxable income is the amount determined above in Step 2. 

4. Determine the amount of the MLS that applies to you 

The MLS rate and the amount you pay depends on your taxable income determined in step 2. To determine your MLS rate see the taxable income ranges below*. 

So if you are single and your taxable income is $110,000 then you will need to pay $1,375 in MLS at the end of the financial year. That’s over $100 per month!

5. Determine if you have to pay the MLS

You will have to pay the MLS for any days you, your spouse or any of your dependants did not hold appropriate health insurance. Your health insurer needs to be registered in Australia and you need to meet the minimum hospital cover requirements. 

To meet the minimum cover requirements you need to have hospital cover which has the necessary level of excess, being: 

• $750 or less if your hospital cover is only for yourself, or 
• $1,500 or less if your hospital cover is for your family. 

Note: having extras cover does not reduce your liability to pay the MLS.

6. Determine the number of days you held appropriate health insurance 

Count the number of days in the financial year you held appropriate health insurance. If you held this for 365 days of the year then you will not have to pay any MLS. 

If you only had appropriate health insurance for part of the year, then you will only have to pay MLS for the portion of the year you did not hold appropriate health insurance. 

So, if you haven’t had appropriate health insurance so far this financial year, it is not too late take out health insurance and start reducing your MLS liability. 

7. Determine whether you will be better off financially by having health insurance

You may be better off financially if your health insurance premium is less than what your MLS liability would be if you did not have appropriate health insurance. The good news is that health insurance in Australia is reasonably priced, so let’s work through an example. 

Going back to the example of a single person with $110,000 in taxable income, they will owe $1,375 in MLS. There are well known health insurance providers offering hospital cover with a $750 excess for singles living in NSW for $845 per year. So this person will not only avoid paying $1,375 at the end of the financial year, they will also be $530 better off by having health insurance. 

Note that this is an example only and you will need to do your own research and calculations or book a call with an Airtax accountant if you have any questions.

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This document merely provides a broad outline of the subject and is necessarily general in nature.  If you require specific advice, which is tailored to your specific circumstances, please do not hesitate to contact us (fees would apply).

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