If you aren’t already familiar with how it works, the Medicare levy surcharge (MLS) is an extra tax that high-income earners in Australia have to pay if they don’t have private hospital insurance. It’s a way that the government encourages people to take out private health cover, thereby reducing the strain on the public healthcare system.
While lots of Australians are required to pay the MLS, some people and families can qualify for Medicare levy exemptions or reductions. Here’s what you need to know about who is exempt from the Medicare levy surcharge, so you can always make the best decisions around your finances and health insurance.
How does the Medicare levy surcharge work?
The MLS is separate from the standard Medicare levy, which is a 2% tax paid by most Australians to help fund the public healthcare system.
This particular tax is calculated based on your taxable income, including fringe benefits and investment income. Depending on that particular amount, your surcharge can range from 1% to 1.5%:
- Singles earning over $97,000 annually pay a surcharge if they don’t have private hospital insurance.
- Couples or families (including single parents) with a combined income exceeding $194,000 are also subject to the surcharge.
Categories for Medicare Levy Exemptions
There are several (4) categories under which individuals can qualify for Medicare levy exemptions, allowing them to avoid paying the surcharge. These exemptions are based on specific criteria such as medical conditions, residency status, or lack of entitlement to Medicare benefits.
1. Medical exemptions from the Medicare levy surcharge
People with certain medical conditions can be eligible for a full or partial exemption from the Medicare levy and the surcharge. To qualify, you need to meet both of the following conditions:
- You have a Category 1 medical condition, which includes:
- Being a blind pensioner.
- Holding a Veterans’ Affairs Repatriation Health Card (Gold Card) that entitles you to free medical treatment for all conditions.
- During the period you met the medical condition, you also fulfilled one of these criteria:
- You had no dependants.
- All your dependants either:
- Qualified for a Medicare levy exemption, or
- Paid the Medicare levy themselves.
- You shared dependants with a spouse who also qualified for a medical exemption or agreed to pay half the levy for joint dependants.
Example scenario: Paul holds a Veterans’ Affairs Gold Card and qualifies for free medical treatment. Paul’s spouse, Mary, does not qualify for the exemption but doesn’t pay the Medicare levy because her income falls below the low-income threshold. Paul is eligible for a half Medicare levy exemption.
2. Foreign residents
Foreign residents living here are generally exempt from the Medicare levy surcharge for any period they are considered non-residents for tax purposes. To qualify for this exemption:
- You must be classified as a foreign resident for the entire income year or part of it.
- During the period of foreign residency:
- You had no dependants, or
- All your dependants were in a Medicare levy exemption category.
Example scenario: Karthik, a resident of Pakistan, works in Australia for short periods during the year but always returns to Pakistan. Since Karthik is considered a foreign resident for tax purposes, he is fully exempt from the Medicare levy surcharge.
3. Not entitled to Medicare benefits
Those who are not entitled to Medicare benefits due to their residency status might also qualify for a Medicare levy exemption. Some of the more common scenarios include:
a) Temporary residents with a Medicare Entitlement Statement
A Medicare Entitlement Statement (MES) from Services Australia confirms that you were not eligible for Medicare benefits. To claim this exemption:
- You must hold a valid MES for the relevant period.
- Your dependants (if any) must also qualify for an exemption.
Example scenario: Priya, on a Temporary Skill Shortage visa, has no dependants and isn’t entitled to Medicare benefits. She gets an MES covering the entire financial year and can claim a full exemption from the Medicare levy surcharge.
b) Members of diplomatic missions or consular posts
Diplomats and their family members will qualify for an exemption if they:
- Are not Australian citizens.
- Don’t ordinarily live in Australia.
- Have no dependants, or all their dependants qualify for a Medicare levy exemption.
4. Dependants and exemptions
The status of your dependants can great influence your eligibility for Medicare levy exemptions. If you’re unsure, dependants include:
- Your spouse.
- Children under 21.
- Children aged 21 to 24 who are full-time students and earn below a specific income threshold. (If your child is married, or in a defacto relationship, they can’t be listed on your cover and cannot be claimed as a dependent, even if the above criteria are true).
- If you support a dependent who doesn’t qualify for a Medicare levy exemption, you might only receive a half-exemption. A family agreement, signed by you and your spouse, could also be required to clarify who claims the full or half-exemption.
Portability
Don’t re-serve waiting periods when you switch to a new health fund or policy
“John was immediately covered for a hip replacement in private hospital because he had already served his waiting periods for joint replacements on his old policy”
What you lose by not qualifying for an exemption
If you don’t qualify for an exemption and your income exceeds the MLS thresholds, you could face a couple of financial consequences:
- Higher tax bill: The MLS can add 1% to 1.5% of your taxable income to your overall tax liability – easily adding upwards of a thousand dollars or more, depending on your earnings for the year.
- Lifetime Health Cover (LHC) loading: If you fail to take out private hospital cover past your 31st birthday, you’ll face a 2% loading on your premiums for every year you stay uncovered, up to a maximum of 70%.
Claiming Medicare levy exemptions
How to claim an exemption
You can claim an exemption through your tax return by completing the Medicare levy section. Depending on your situation, you’ll need to choose one of the exemption categories:
- Medical exemption: Automatically calculated when you provide relevant details about your condition or dependants.
- Foreign resident exemption: You’ll need to share documentation proving your residency status.
- Not entitled to Medicare benefits: Submit a Medicare Entitlement Statement alongside your tax return.
Medicare Entitlement Statement (MES)
If you aren’t entitled to Medicare benefits, you must apply for an MES through myGov. Applications can take up to eight weeks, so plan ahead if tax time is approaching.
Alternatives to paying the surcharge
If you don’t qualify for an exemption but want to avoid the MLS, you’ll need to take out private hospital cover. Even the most basic hospital policy can help you meet the MLS requirements while giving you some peace of mind about your future healthcare needs.
Switching providers or downgrading cover
- Switching: Compare health insurance policies to find one that meets your needs without breaking the bank.
- Downgrading: Move over to a basic policy that fulfils the MLS requirements but costs less than Silver or Gold tier cover.
Conclusion
For those who don’t qualify for an exemption, taking out private hospital insurance is the best way to avoid paying the surcharge, while at the same time giving you the protection of valuable healthcare services. At Fair Health Care Alliance, we’re here to help you compare your health insurance options and find a policy that fits your lifestyle and budget.
