The Medicare Levy Surcharge: The Cover That Doesn't Count

There are two taxes here with almost the same name, and most people assume they are the same thing. The Medicare levy is 2% of your taxable income and nearly everyone entitled to Medicare pays it. The Medicare levy surcharge is separate, applies only to higher earners without private hospital cover, and is entirely avoidable.

The expensive part is the middle ground: people who are paying for health insurance and paying the surcharge as well. At Aevum Accounting we see it most often in returns that have looked the same for years, which is also why it is usually recoverable. Here is what actually counts, what does not, and where the money goes.

Prefer to listen? We covered this in The Medicare Levy, the Surcharge, and the Cover That Doesn't Count, episode 56 of the Aevum Accounting Podcast.

The levy, and who is exempt from it

The 2% levy has no opt-out, but it does have low-income thresholds. For 2025-26, a single person on $28,011 or less pays nothing, and it phases in gradually up to $35,013. The ATO has not published new thresholds for 2026-27 yet, so those are the figures for the return you are lodging now. They are higher again if you get the seniors and pensioners tax offset.

Two groups can be exempt outright. The first is the medical category: blind pensioners, people entitled to full free medical treatment for all conditions under Defence Force arrangements, and Veterans' Affairs Gold Card holders. Note "for all conditions", which excludes people whose free treatment only covers service-related conditions. The second is people not entitled to Medicare at all, mostly temporary visa holders, who need a Medicare Entitlement Statement from Services Australia and must hold it before they lodge.

The trap in that second group is nationality, not visa. Australia has reciprocal health care agreements with eleven countries, whose citizens generally get Medicare access and so generally cannot get the statement. Two people on identical visas in the same job can get different answers.

The surcharge, and what income it uses

For 2025-26 the surcharge starts above $101,000 for singles and $202,000 for families, rising to 1.25% above $118,000 and 1.5% above $158,000. From 1 July 2026 those steps moved to $105,000, $123,000 and $164,000, with family thresholds double throughout plus $1,500 for each dependent child after the first.

The income tested is not your salary. It is taxable income plus reportable fringe benefits, net investment losses and reportable super contributions, the same broad measure that catches people out with Division 293.

One fine distinction almost everything written about this gets wrong: that broad figure decides which tier you land in, but the rate is then applied to a narrower base of taxable income, reportable fringe benefits and any family trust distribution tax amount. A rental loss can change the rate you pay without being surcharged itself.

Two exceptions worth knowing. If your own surcharge income is $28,011 or less you pay nothing regardless of what your spouse earns. And a single parent uses the family threshold, so a sole parent on $150,000 with one child pays no surcharge at all.

The cover that does not count

This is where the money is lost. Only an appropriate level of private patient hospital cover from a registered Australian insurer exempts you.

Extras cover does nothing. Dental, optical and physio are not hospital cover. What makes this so convincing is that the rebate does apply to extras, so you receive 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.

Your excess is capped. To count, the yearly excess can be no more than $750 for a single policy or $1,500 for a couple or family. People buying purely to dodge the surcharge sort the comparison site by cheapest, and cheapest usually means highest excess. They buy a policy that fails the one job they bought it for.

Overseas visitors cover does not count either. If your visa requires health insurance, overseas visitors or overseas student cover satisfies the visa but is not a complying policy. It does not exempt you from the surcharge and does not attract the rebate. The fix is a complying Australian policy in addition to it, not instead of it, since the visa condition still has to be met.

Days, not policies

The surcharge is worked out daily, which makes gaps expensive. Switching funds is fine as long as there is no gap. Cancelling in March means paying the surcharge for the rest of the year.

The one that catches people is suspending cover while travelling overseas. It feels sensible, but a suspended policy is not cover for surcharge purposes, and the government's private health site says so plainly. You pay for every suspended day. If you are over the threshold, do the sums before you suspend for three months.

The tier boundary is a cliff, not a slope

Each rate applies to your whole income, not just the amount above the step. On the 2025-26 thresholds, $118,000 attracts 1% and costs $1,180. One dollar more puts you in the 1.25% tier, and the bill becomes $1,475. That single dollar costs $295.

It is a real reason to know where you sit before 30 June, because something as ordinary as the timing of a bonus can push you across.

So should you just buy a policy?

It depends on your income, and most people do the sum wrong by comparing the surcharge to the sticker price of a premium. Most get the rebate, a little over 24% at the base tier under 65, so a $1,200 policy is closer to $911. That is the number worth comparing.

Just over the threshold the surcharge is around $1,050 and a basic policy can net out below it. A tier up it is not close: at $130,000 the surcharge is $1,625, paid for nothing.

We are accountants, not insurance advisers, and a policy is not only a tax decision. What we can tell you is what you are currently paying to receive nothing, and roughly where the line sits for your income.

Lifetime health cover loading

If you do not take out hospital cover by the 1 July following your 31st birthday, a 2% loading is added to your premium for every year you waited. Joining at 40 is a 20% loading, at 50 it is 40%, and it caps at 70%.

The part people do not know is that the rebate does not apply to the loading. On a $1,500 premium a 40% loading adds $600 a year, entirely unsubsidised. The good news is that it comes off after ten continuous years of cover.

If any of this sounds like your situation, it is worth checking, because a mistake here is usually a mistake in earlier years too and amendments may be available. Book a consultation with our team and we can work out where you actually sit, or read more about how our tax accountants in Perth handle individual returns.

The information in this article is general in nature and does not take into account your personal circumstances. It does not constitute specific tax or financial advice. Everyone's situation is different, so we recommend speaking with a qualified professional at Aevum Accounting before acting on anything you have read here.