Everything you need to know about the Medicare levy surcharge

Medicare, Australia’s public health system, ensures all Australians have equitable access to healthcare when they need it. The system pays for all, or some, of the costs of various medical services in public and private hospitals. It's funded primarily by taxpayers, who pay the Medicare levy and, in some cases, the Medicare levy surcharge.

But what exactly is the Medicare levy surcharge and can it be avoided?

The Medicare levy surcharge, or MLS, is paid by Aussie taxpayers who earn above a certain income threshold and don't have private hospital cover. The aim of the surcharge is to prompt those in a higher income bracket to take out private health insurance and reduce stress on the public Medicare system. 

The surcharge covers you, any dependents (this includes any children under 21, any full-time student children under 25), or your spouse. 

The Medicare levy and Medicare levy surcharge both help pay for Medicare. 

The Medicare levy is a 2% tax on top of your taxable income, which may be reduced based on how much you earn. You won't have to pay the levy if you have certain medical requirements, are not eligible for Medicare, earn under a certain amount, or are a foreign resident working in Australia.

Essentially, if you are eligible for Medicare, and earn over $24,276 as a single or $40,939 as a family, you pay the Medicare levy. 

The Medicare levy surcharge only applies to higher-income earners (over $90,000 for singles and $180,000 for families) who do not have private hospital coverage. 

The Medicare levy surcharge amounts to 1 to 1.5% of your income, depending on how much you earn. The government uses a special definition of income to calculate if you’ll have to pay the MLS, and at what rate, called income for MLS purposes. It is levied on your taxable income, your total reportable fringe benefits (like access to a work gym or company car), and any amount where tax has been paid to a family trust. 

The Australian Taxation Office (ATO) will typically work out if you need to pay the MLS based on the information provided in your tax return and deduct it at the same time as your Medicare levy.

To avoid the surcharge, you must meet at least one of the following criteria:

• You’re single with a taxable income for MLS purposes under $93,000
• You’re a family with a combined taxable income for MLS purposes under $186,000 
• Your income is over the threshold but you have approved hospital insurance from a registered health insurer 
• Your income is not considered because you are under 18 and do not have any dependents.

If you are above the threshold for your own or your family’s income, you must obtain hospital cover for yourself, your partner, and your dependents to avoid the surcharge. If your partner or any dependents are not covered, you will have to pay the MLS.

If you’re over the age of 21, on a family hospital policy, and earning over the income threshold, you’ll still have to pay the MLS. To avoid paying for the MLS, you’ll have to take out individual hospital cover. For singles, the level of cover needs to have an excess of $750, and for families or couples, the excess should be $1500 or less.

If you bought hospital cover later on in the year, you will need to pay the surcharge for the days you didn't hold cover, or any days your payment was suspended – like during an overseas holiday, for example. 

Like the Medicare Levy surcharge, Lifetime Health Cover, or LHC, is a government initiative designed to encourage people to invest in hospital cover.

Once you turn 30, a 2% loading is added on top of your hospital cover premium for every year you don't purchase and maintain hospital cover. If you buy and keep hospital cover before your base day, which is the 1st of July following your 31st birthday, you will not have to pay for LHC loading. 

Once LHC loading is applied to your hospital cover, it can only be removed when you’ve held hospital cover for 10 continuous years. As long as you retain your hospital cover your loading will remain at 0%. If you cancel your cover after your LHC loading is removed, you might have to pay for LHC loading when you take out hospital cover again.

If you have hospital cover on or after your base day, you are entitled to 1,094 days without hospital cover which won't affect your LHC loading status. 

Always check with your health fund, as trips where you’re considered to be living overseas (away from Australia for more than one continuous year), may not count towards your 1,094 permitted days. 

Medicare allows equitable access to healthcare services no matter where you live. It's primarily tax-funded, meaning Australian taxpayers fork out a portion of their pay to keep it running (even more if you earn over the threshold). If you’re a high-income earner, you’ll need to seek out private hospital cover to alleviate stress on the system for low-income earners, otherwise you will need to pay the Medicare levy surcharge.