The Medicare Levy, the Surcharge, and the Cover That Doesn't Count

Mia: Welcome to the podcast, our newsletter made easy. Please note, this podcast features AI-generated voices for your hosts, Mia Taylor Leo: and Leo Baker, bringing you expert insights from the team at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax, whether it's for your individual finances or the complexities of your business. Mia: We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. Leo: So, if you're looking to understand your obligations, maximise your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Mia: This one comes from Zoe. She says the team was approachable, asked relevant questions, and gave suggestions to improve her return, including things that had been overlooked in previous years. Leo: Thank you, Zoe. And things missed in earlier returns is the right way in today, because this is a topic where people quietly overpay for years and never find out. Mia: What are we covering? Leo: The Medicare levy. And the Medicare levy surcharge, which is a completely different thing that shares most of a name. Mia: I've always assumed they were the same tax. Leo: Almost everyone does, and that's exactly why people get caught. So let's separate them. There are three things in play today. The levy, the surcharge, and private health insurance. They interact, but they are not the same thing. Mia: Before we start, which year are we using? Leo: Most people listening are about to lodge, or have just lodged, their twenty twenty-five, twenty twenty-six return, so we'll lead with those numbers. The thresholds went up on the first of July, so I'll flag the new ones as we go. Mia: Good. Start with the levy. Leo: The Medicare levy is two per cent of your taxable income, and if you're entitled to Medicare, you pay it. There's no threshold you cross, no choice involved. It's just part of your tax. Mia: Two per cent of everything? Leo: Two per cent of your taxable income. On ninety thousand dollars, that's eighteen hundred dollars a year. It sits in your assessment and most people never look at it. Mia: Is there anyone who doesn't pay it? Leo: Yes. There are low-income thresholds. For the twenty twenty-five, twenty twenty-six year, if you're single and your taxable income is twenty-eight thousand and eleven dollars or less, you pay no levy at all. Mia: And just above that? Leo: It phases in. Between that figure and thirty-five thousand and thirteen dollars, you pay a reduced levy rather than the full two per cent. Above thirty-five thousand and thirteen, you're paying the full amount. Mia: So it eases in rather than switching on. And are those figures different for the current year? Leo: The tax office hasn't published the new low-income thresholds yet, so the ones I've given you are the right ones for the return you're lodging now. The thresholds are higher again if you get the seniors and pensioners tax offset. Mia: Okay. Now, you said some people are exempt entirely. Leo: Two groups, and both come up more than you'd think. The first is medical, and it has three limbs. Blind pensioners. People entitled to full free medical treatment for all conditions under defence force arrangements. And Veterans' Affairs Gold Card holders. Mia: So army, navy, air force. Leo: Careful there, because the test isn't the uniform, it's the entitlement. Full free medical treatment for all conditions. That wording is what excludes people whose free treatment only covers service-related conditions, which catches a lot of reservists. Mia: And is that the same as having hospital cover? Leo: No, and that distinction is worth making because people muddle the two. This is an exemption from the levy in its own right. The tax office does not treat it as private hospital cover, because it isn't. It does also take you out of the surcharge for those days, but only if you and all your dependants are either in an exemption category or holding hospital cover. Mia: Is it a full exemption? Leo: It depends on your family. If you're single, or your whole family is in the same position, it's a full exemption. If you have a spouse or dependants who are entitled to Medicare and have to pay the levy, you generally get a half exemption instead, because they're still using the system. Mia: That's a detail I'd never think to ask about. Leo: And it's worth asking, because we see returns where someone has simply paid the full two per cent for years without anyone querying it. That's amendable. Mia: Right. And the second group? Leo: People who aren't entitled to Medicare at all. Which in practice mostly means temporary visa holders. Mia: So if you're here on a work visa and you can't use Medicare, you shouldn't be paying for it. Leo: That's the logic. But you can't just tick a box. You need a Medicare Entitlement Statement from Services Australia, and you need to actually hold it when you lodge, because the tax office can ask to see it. Mia: And if someone's been paying it for years and shouldn't have been? Leo: You can request statements covering earlier years too, and amendments may be available. We've seen that put real money back in people's pockets. It's worth starting the application well before lodgement rather than on the day, because it can take weeks. Mia: Now, is that everyone on a temporary visa? Leo: No. And this is the part that surprises people, so I want to be precise. Australia has reciprocal health care agreements with eleven countries. The United Kingdom, Ireland, New Zealand, Italy, Malta, Sweden, Finland, Norway, the Netherlands, Belgium and Slovenia. Mia: And what does the agreement do? Leo: It gives their citizens access to Medicare while they're here. Which is good news medically. But for tax purposes, it means they are entitled to Medicare. Mia: So they can't get the statement. Leo: Generally not, and therefore they pay the levy like everyone else. But the agreements are not all the same, and the differences matter. Italy and Malta are capped at six months from each arrival, and only for citizens of those countries. Ireland and New Zealand are narrower again in a different way. Public hospital care and subsidised medicines only, no benefits for out-of-hospital doctor visits, and those visitors don't actually enrol in Medicare at all. Mia: So there are gaps where someone could still qualify. Leo: There are. A New Zealand citizen who's been here less than six months in a twelve-month period can get the statement. And once an Italian or Maltese visitor is past their six months, the balance of the year opens up too. Mia: So two people could be on the same visa, in the same job, and get different answers. Leo: Precisely. Someone from the United States on a skilled visa can typically get the statement and be exempt. Their British colleague on the identical visa usually can't, because the agreement has given them Medicare access. Mia: Any catches on the American side? Leo: Two worth knowing. The statement is not enough on its own. If you have a spouse or dependants who are entitled to Medicare, you don't get the exemption even holding it. And the regional skilled visas are excluded from the statement entirely. Mia: That's completely counterintuitive. Leo: It is. Nationality is doing a lot of the work here, not the visa. So it's worth checking rather than assuming either way. Mia: Alright. That's the levy. Now the surcharge. Leo: The Medicare levy surcharge is a separate charge, on top of the levy, and it only applies to higher income earners who don't hold private hospital cover. Mia: Emphasis on hospital. Leo: Heavy emphasis on hospital. We'll come back to that, because it's where most of the damage happens. Mia: What are the income levels? Leo: For the twenty twenty-five, twenty twenty-six year, a single person starts paying once they're over one hundred and one thousand dollars. For families it's over two hundred and two thousand. Mia: And this year? Leo: Both went up on the first of July. Singles now start at one hundred and five thousand, families at two hundred and ten thousand. Mia: So a bit more headroom. Leo: Four thousand for singles, eight for families. Which sounds small, but if you were just over the old line you might be under the new one. Mia: Is it a flat rate once you're over? Leo: No, it steps up in tiers. For the year you're lodging, it's one per cent from one hundred and one thousand, one and a quarter per cent from one hundred and eighteen thousand, and one and a half per cent from one hundred and fifty-eight thousand. Mia: And the new year? Leo: Same three rates, higher steps. One hundred and five, one hundred and twenty-three, and one hundred and sixty-four thousand. Mia: And families are double throughout? Leo: Double, and then the family threshold rises by fifteen hundred dollars for each dependent child after the first. Mia: What about a couple where one of them earns very little? Leo: There's a useful exception there, and it's not well known. If your combined income is over the family threshold, both of you are exposed in principle. But if your own income for surcharge purposes is twenty-eight thousand and eleven dollars or less, you don't pay it, no matter what your spouse earns. Mia: And a single parent? Leo: Uses the family threshold, not the single one. One dependent child takes you from one hundred and five thousand to two hundred and ten. So a sole parent on a hundred and fifty thousand pays no surcharge at all, and a lot of people in that position have no idea. Mia: Leo, what does that cost in actual dollars? Leo: On one hundred and ten thousand dollars, one per cent is eleven hundred dollars a year. On one hundred and thirty thousand you're in the middle tier, so it's sixteen hundred and twenty-five. On two hundred thousand, it's three thousand dollars. Mia: Every year you don't have cover. Leo: Every year. Mia: I want to come back to the tiers, because something occurred to me. What happens right at a boundary? Leo: This is worth hearing, because it's a cliff rather than a slope. Take the year you're lodging. At one hundred and eighteen thousand dollars exactly, you're on one per cent, so eleven hundred and eighty dollars. Mia: And a dollar more? Leo: At one hundred and eighteen thousand and one, you've moved into the one and a quarter per cent tier. And that rate applies to your whole income, not just the extra dollar. So the surcharge jumps to fourteen hundred and seventy-five dollars. Mia: So one dollar of income costs nearly three hundred. Leo: Two hundred and ninety-five, near enough. And that's a genuine reason to know where you sit before the year ends, because things like the timing of a bonus can put you over. Mia: Leo, is the income here the same as taxable income? Leo: No, and if you heard our Division 293 episode, this will sound familiar. The surcharge uses a broader measure. Taxable income, plus reportable fringe benefits, plus net investment losses, plus reportable super contributions. Mia: The same trap as last time. Someone negatively geared could look under the line and not be. Leo: The same trap, and it's a similar underlying idea. Your salary is only part of the picture. Mia: And the surcharge is charged on that broader number? Leo: No, and this is a fine distinction that almost everything written about this gets wrong. The broader number decides which tier you land in. The rate is then applied to a narrower base. Your taxable income, your reportable fringe benefits, and any amount you've paid family trust distribution tax on. Mia: So a rental loss can push you into a tier without being taxed itself. Leo: Exactly that. It changes the rate you pay, not the amount you pay it on. Mia: Okay. So what actually gets you out of the surcharge? Leo: An appropriate level of private patient hospital cover, from a registered Australian health insurer, held for the whole year. Mia: And extras doesn't count. Leo: Extras cover, so dental, optical, physio, does nothing for the surcharge. Nothing at all. Mia: So someone could be paying for private health insurance every month and still be paying the surcharge. Leo: And we see it. They have a policy, they assume they're covered for this, and they're not, because it's extras only. If it doesn't include hospital, it doesn't count. Mia: That's paying twice for the same problem. Leo: It is, and here's what makes it so convincing. The rebate does apply to extras cover. So you get the government subsidy, you get a private health insurance statement in the post, you tick the private health box in your return, and you are still assessed the full surcharge. Everything about it looks right. Mia: So read the policy rather than assuming. Leo: Read the policy. Mia: You said held for the whole year. Leo: The surcharge is worked out daily. So if you cancel in March, you pay the surcharge for the portion of the year you weren't covered. Mia: What about switching funds? Leo: Fine, as long as there's no gap. It's the gap that costs you, not the switch. Mia: And this is the one I hadn't heard before we prepared this. Leo: Suspending your cover. A lot of funds let you suspend while you're overseas, which feels sensible. You're not here, why pay? Mia: And I'm guessing that backfires. Leo: A suspended policy is not cover for surcharge purposes. The government's own private health site says it plainly. You're not exempt during the suspended period, and you pay the surcharge for those days. Mia: So the sensible-looking money-saving move quietly costs you. Leo: It can, if you're over the threshold. Worth doing the sums before you suspend for three months. Mia: Alright. And there's one more condition on the policy itself, isn't there. Leo: There is, and this one is genuinely obscure. Your excess is capped. To count as exempting cover, the yearly excess can be no more than seven hundred and fifty dollars for a single, or fifteen hundred for a couple or family. Mia: So a policy with a higher excess doesn't exempt you. Leo: It doesn't. And think about what people do when they're buying purely to dodge the surcharge. They sort the comparison site by cheapest, and cheapest usually means highest excess. Mia: So they buy the cheapest policy on the list, and it doesn't do the one job they bought it for. Leo: That's the trap exactly. Check the excess, not just the premium. Mia: Now, there's one more version of this, and I think it's the one that catches people hardest. Leo: Overseas visitors health cover. You're right, this is the one. Mia: Explain it. Leo: If you're here on a temporary visa, your visa conditions often require you to hold health insurance. So people buy overseas visitors health cover, usually from an Australian fund, and reasonably assume that's private health insurance. Mia: It's sold by a health fund, it covers hospital, it looks like the real thing. Leo: It does. But it is not a complying policy. The government's own private health website lists it explicitly. Overseas visitors cover, overseas student health cover, and cover held with non-registered international insurers. None of them exempt you. Mia: So what does that mean in practice? Leo: Two things. It does not get you out of the surcharge, and it doesn't attract the private health insurance rebate either. Mia: So they're paying for cover, and paying the surcharge on top, and getting no rebate. Leo: That's the situation. And these are often people on good incomes, well over the threshold, who have done exactly what their visa asked of them. Mia: What's the fix? Leo: If they're liable for the surcharge, they need a complying policy from a registered Australian insurer, and it needs to be in addition to the overseas cover, not instead of it, because the visa condition still has to be met. Mia: Two policies. Leo: Sometimes, yes. Several funds sell a low-cost complying policy designed for exactly this. The key point is that one does not replace the other. Mia: And for someone from one of those reciprocal agreement countries? Leo: They can buy an approved hospital policy and it does avoid the surcharge. Worth knowing though, and the government's own site makes this point, that for someone on reciprocal Medicare benefits that cover provides limited benefits for hospital treatment, and you can still face significant costs if you're admitted as a private patient. It solves the tax problem more than the health one. Mia: Alright, the practical question. If I'm over the threshold and I don't have cover, should I just buy a policy? Leo: It depends on your income, and there's one thing people miss when they do this sum. Mia: Then let's hear the honest one. Leo: They compare the surcharge to the sticker price of a policy. But most people get the rebate, which knocks the premium down. Base tier, under sixty-five, that's a bit over twenty-four per cent. Mia: So a twelve hundred dollar policy actually costs? Leo: Around nine hundred and eleven dollars, after the rebate. And that's the number you should be comparing. Mia: Which changes the answer. Leo: It does. If you're just over the threshold, your surcharge is around a thousand dollars, and a basic policy might net out below that. Move up a tier and it isn't close. At one hundred and thirty thousand the surcharge is sixteen hundred and twenty-five, and you're paying that for nothing. Mia: I should say, we're not telling anyone to buy insurance. Leo: No. We're accountants, not insurance advisers, and a policy isn't only a tax decision. There are excesses, waiting periods, and real limits on what's actually covered. What we can tell you is what you're currently paying to receive nothing, and roughly where the line sits for your income. Mia: Tell me more about the rebate, since it's doing a lot of work there. Leo: It's income-tested on the same tiers as the surcharge. Most at the base tier, stepping down to zero at the top. You claim it either as a reduced premium through your fund, which is what most people do, or as a tax offset when you lodge. Same value either way. Mia: And if you pick the wrong tier? Leo: This is the fourth trap, and it's a common one. When you claim through your fund, you nominate the tier you expect to be in. If you guess too low, you've received more rebate than you were entitled to, and the tax office recovers the difference when you lodge. Mia: So a surprise bill, for doing nothing wrong. Leo: The tax office doesn't call it a penalty. It's a reconciliation, and it shows on your assessment as excess private health insurance refund or reduction. It works the other way too. Nominate too high and the shortfall comes back to you as a refundable offset. But it's an unwelcome surprise either way, so if your income jumped this year, it's worth telling your fund. Mia: Leo, last one, and I think this is the one people should hear before they turn thirty-one. Leo: Lifetime health cover loading. And yes, this one is time-sensitive in a way the others aren't. Mia: How does it work? Leo: If you don't take out hospital cover by the first of July following your thirty-first birthday, a loading is added to your premium when you eventually do. Two per cent for every year you waited. Mia: On top of the premium. Leo: On top. So joining at forty is a twenty per cent loading. At fifty, forty per cent. At sixty, sixty per cent. And it caps at seventy per cent, which you reach at sixty-five. Mia: In dollars? Leo: On a fifteen hundred dollar premium, a forty per cent loading takes it to twenty-one hundred. Six hundred dollars a year, purely for having waited. Mia: And I assume the rebate helps with that. Leo: It doesn't, and this is the part people don't know. The rebate does not apply to the loading component. You get it on the standard part of your premium, but the loading is entirely yours. Mia: So the loading is worse than it looks on paper. Leo: Meaningfully worse, yes. Mia: Is it forever? Leo: No, and that's the good news. Once you've held cover and paid the loading for ten continuous years, it comes off. Mia: And the date that matters is the first of July? Leo: The first of July following your thirty-first birthday. Not your birthday, and not the day you sign up. So if you're thirty, the calendar matters more than you'd think. Mia: Alright, let's bring it together. If someone's listening and isn't sure where they stand, what do they check? Leo: Four things. Are you actually entitled to Medicare, because on a temporary visa you might not be. If you're in a medical exemption category, check the exemption was applied. Work out your real surcharge income, not just your salary. Mia: And the fourth? Leo: If you hold a policy, check three things about it. That it includes hospital, that the excess is under the cap, and that it's a complying Australian policy rather than overseas visitors cover. Mia: And if any of those are wrong? Leo: Then they're probably wrong for earlier years too, and amendments may be available. This is one of the more commonly recoverable errors we see. Mia: So let's recap. The Medicare levy is two per cent, and if you're entitled to Medicare you pay it, subject to the low-income thresholds. Leo: Blind pensioners, people with full free medical treatment for all conditions and Gold Card holders can be exempt, and so can people not entitled to Medicare. But that needs a statement from Services Australia, and the eleven reciprocal agreement countries generally don't qualify. Mia: The surcharge is separate. For the return you're lodging it starts at one hundred and one thousand for singles, and from the first of July it's one hundred and five. Leo: Only hospital cover gets you out of it. Extras does nothing, overseas visitors cover does nothing, and if your excess is over seven hundred and fifty dollars the policy doesn't exempt you either. Mia: Don't suspend your cover without doing the sums first. Leo: And crossing a tier boundary is a step, not a slope. One dollar can cost you nearly three hundred. Mia: If you're not sure which of these applies to you, head to aevumaccounting.com.au and book a session with the team. Leo: Or head to Aevum Accounting at aevumaccounting.com.au and we'll check whether you've been paying something you never needed to pay. Mia: Before we go, a quick but important reminder. The information shared today is for general informational purposes only, and does not constitute specific tax or financial advice. Leo: Everyone's situation is unique, and tax laws are complex. For personalised advice tailored to your situation, we always recommend consulting with a qualified professional. Mia: Until next time, stay savvy, stay proactive... Leo: And go and check the excess on your policy!