The Medicare levy and the Medicare levy surcharge

Two charges with confusingly similar names

Almost every conversation about Medicare and tax goes wrong in the same place: the levy and the surcharge are treated as one thing. They are not. They have different rates, different thresholds, different definitions of income, and only one of them can be avoided by buying insurance.

• The Medicare levy is 2% of taxable income. It applies to most Australian residents regardless of income, with a reduction at the bottom of the scale. Private health cover makes no difference to it.
• The Medicare levy surcharge is an additional 1% to 1.5% charged only to people above an income threshold who did not hold an appropriate level of private patient hospital cover. It is avoidable — by holding the cover.

Someone above the threshold with no hospital cover pays both. On a taxable income where the top surcharge tier applies, the combined Medicare charge is 3.5% of income rather than 2%. The rest of this guide takes them one at a time.

The levy: 2% of taxable income, with a shade-in underneath

The levy is charged on taxable income — the same figure the income tax brackets use — at 2%. It is not part of the bracket table, so a marginal rate of 30% is really 32c in the dollar once the levy is counted. The income tax brackets guide covers the rates the levy sits on top of.

At the bottom of the scale the levy is reduced rather than switched on abruptly. Below the lower threshold you pay none. Between the lower and upper thresholds it shades in at 10c for each dollar above the lower figure. Above the upper threshold you pay the full 2% on the whole of your taxable income.

Family thresholds, and what counts as a family

If you had a spouse for any part of the year, or you were a sole parent with a dependent child, the low-income reduction is tested against your combined family taxable income against the family thresholds instead of the single ones. The family thresholds are considerably higher, and they rise again for each dependent child.

A couple with two dependent children has a lower threshold of $47,238 plus two lots of $4,338, which is $55,914, and an upper threshold of $59,047 plus two lots of $5,423, which is $69,893. The two increments differ because the pair has to keep the same 10c shade-in geometry as it moves up.

The family test reduces your levy; it does not replace it. Your levy is still calculated on your own taxable income, then reduced by an amount worked out from your combined income: 2% of the family lower threshold, less 8% of the family income above it. The reduction cannot take your levy below zero. This is how the ATO’s Medicare levy calculator works, and it does not split the reduction between partners. Two people with the same personal income can therefore pay different levies depending on what their partner earned.

The surcharge: an extra charge you can opt out of

The surcharge exists to push higher earners towards private hospital cover and away from the public system. It applies if your income for surcharge purposes is above the base threshold and you did not hold an appropriate level of private patient hospital cover.

The income being tested is not your taxable income. Income for MLS purposes is broader: it adds back amounts such as reportable fringe benefits, reportable employer superannuation contributions and total net investment losses. Someone salary sacrificing heavily, or negatively gearing a property, can have a taxable income well under the threshold and still be liable. If you are in a couple, the family thresholds are tested against your combined income.

Why the surcharge is a cliff when income tax is not

A pay rise can never reduce your take-home pay through the income tax brackets, because each bracket rate applies only to the income above its threshold. The surcharge does not work that way. Once you are over a threshold, the rate applies to your whole income for surcharge purposes, not to the excess.

Income tax:  rate × (income − threshold)     ← marginal
Surcharge:   rate × income                  ← the whole lot

The consequence is a genuine cliff at the base threshold. Income for surcharge purposes of $105,000 attracts nothing. One dollar more attracts 1% of the entire $105,001, which is $1,050.01. A single extra dollar of income costs a little over a thousand dollars. Smaller versions of the same step happen at each tier boundary: at $123,000 the surcharge is $1,230, and one dollar higher it is $1,537.51.

This is the one place in Australian personal tax where the folk wisdom about being “pushed into a higher bracket” is close to accurate — and it is not a bracket, it is a surcharge. It is also the strongest argument for checking your position before 30 June rather than discovering it when you lodge.

Working out whether hospital cover costs less than the surcharge

The comparison is arithmetic you can do in a minute, and it is worth doing with real numbers rather than assumptions. It is not advice, and the answer depends entirely on what a policy actually costs you.

The arithmetic

• Work out your income for surcharge purposes, remembering the add-backs. If you are in a couple, use the combined figure against the family thresholds.
• Find your tier in the table above and multiply your whole income by that rate. That is the surcharge you would pay for a full year without cover.
• Get an actual quote for a complying hospital policy, for the full year, after any private health insurance rebate you are entitled to.
• Compare the two. If the policy costs less than the surcharge, you are paying less and receiving cover instead of receiving nothing.

Three details change the answer often enough to be worth checking. A policy only exempts you if it is hospital cover from a registered insurer — extras-only cover does not count, however comprehensive it looks. Policies with an excess above the limit set for surcharge purposes also fail the test, so a cheap high-excess policy can leave you paying the surcharge anyway; check the current excess limit before you buy on price. And the private health insurance rebate is income-tested, so the rebate that reduces a friend’s premium may not reduce yours by the same amount.

The other thing the arithmetic will not tell you is what the cover is worth to you. A policy bought purely to dodge the surcharge is still a policy, with waiting periods, exclusions and gap payments. Compare the premium with the surcharge, then decide separately whether the cover itself is something you want.

What the OzCalc Medicare calculators do and do not model

There are two separate tools because these are two separate charges. The Medicare levy calculator applies the 2% rate with the single or family low-income reduction and the per-child increments, and can switch to the SAPTO thresholds. The Medicare levy surcharge calculator takes income for surcharge purposes, a household type and whether you held hospital cover, and returns the tier and the amount.

Both are estimates with real simplifications. Neither works out your income for you: the levy calculator needs taxable income and the surcharge calculator needs income for MLS purposes, and those two figures are frequently different. The surcharge calculator treats cover as held for the whole year or not at all, so it will not pro-rate a policy you took out in October. Neither models a levy exemption, a levy variation you have arranged with your employer, or the private health insurance rebate.

To see both charges in the context of a whole salary, alongside income tax and PAYG withholding, work through how Australian take-home pay is actually calculated.

Common questions