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Understand the interaction between private health insurance and tax

Interaction between private health insurance and tax

Ursula Lepporoli discusses how the choice to purchase or abstain from private health insurance can have significant tax implications. In this article Ursula constructs three taxpayer scenarios in order to understand how to avoid owing money to the tax office.


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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.

The basics

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 paid upon lodging a tax return for investment income. 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). You might be surprised to find that Penelope's income puts her in the top 3.8 percent of Australians who earn in excess of $156,000 per annum*

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 ($1,800).

But don't forget: When Penelope signed up for 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 an 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.

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