The Medicare Levy Surcharge (MLS) is an additional tax imposed on Australian taxpayers who earn above a certain income and don’t have Private Health Insurance. Understanding how MLS works and how to avoid it can save you a significant amount of money. Let’s dive into the details.
What is the Medicare Levy Surcharge (MLS)?
The Medicare Levy Surcharge is designed to encourage individuals and families to take out private hospital cover, thereby reducing the burden on the public healthcare system. If your income surpasses the specified thresholds and you don’t have private hospital cover, you’ll be liable for the MLS.
Who Pays the Surcharge?
If you are a single earning over $97,000 or a family earning over $194,000, you are subject to the MLS. The surcharge ranges from 1% to 1.5% of your income, depending on your income bracket. For families, the income threshold increases by $1,500 for each MLS dependent child after the first child. For up to date income thresholds and rates click here.
How is MLS Calculated?
MLS considers more than just your taxable income. It is the sum of the following:
- Taxable Income
- Reportable Fringe Benefits
- Total Net Investment Losses (Rental & Investment)
- Reportable Super Contributions
Even though some of these components initially reduce taxable income, they are added back for MLS purposes.
Example: Medicare Levy Surcharge for a Single Adult
In the 2024–25 income year, Sarah doesn’t have the appropriate level of private patient hospital cover and is:
- 35 years old
- Single without any dependants.
Sarah’s taxable income is $95,000. When Sarah completes her tax return, she also completes the income test section and declares total reportable fringe benefits of $25,000.
Sarah’s income for MLS purposes is $120,000 ($95,000 taxable income and $25,000 total reportable fringe benefits).
Therefore, Sarah is a Tier 2 income earner and the Tier 2 MLS rate that applies to her is 1.25%.
The amount of MLS is calculated on her taxable income of $95,000 and total reportable fringe benefits of $25,000.
Sarah’s MLS liability for 2024–25 is $1,500 ($120,000 × 1.25%).
How to Avoid the Surcharge
To avoid the MLS, you must have an appropriate level of hospital cover. Here’s what you need:
- Singles: Cover with an excess of $750 or less.
- Couples/Families: Cover with an excess of $1,500 or less.
It’s important to note that ‘Extras’ or general cover, including optical, dental, physiotherapy, or chiropractic treatments, doesn’t qualify as private patient hospital cover. Travel insurance and overseas fund cover also do not meet MLS criteria.
Tax Tips to Avoid MLS
- Don’t Fall for Marketing Tricks: Taking out cover at the end of the financial year won’t fully exempt you from the MLS; it will only provide a partial exemption for a few days.
- Remember ‘Extras’ Coverage: Extras coverage alone won’t exempt you from the MLS.
- Partial Exemption: If you take out Private Insurance partway through the year, you will have a partial exemption from the MLS.
How NexGen Business & Tax Services Chartered Accountants Can Help
At NexGen Business & Tax Services Chartered Accountants, we specialise in helping you navigate the complexities of the Medicare Levy Surcharge. Here’s how we can assist you:
- Personalised Advice: We provide tailored advice to help you understand your MLS obligations and how to avoid the surcharge.
- Tax Planning: Our team can help you plan your finances to ensure you meet the necessary criteria for avoiding the MLS.
- Ongoing Support: We offer continuous support throughout the year, ensuring your tax planning is always up-to-date.
- For more services click here.
Conclusion
Avoiding the Medicare Levy Surcharge is not just about saving money; it’s about making informed decisions that benefit your financial health. By understanding the MLS and taking proactive steps, you can ensure you’re not caught off guard by this additional tax. If you need assistance, don’t hesitate to reach out to NexGen Business & Tax Services Chartered Accountants. We’re here to help you navigate this process and achieve the best possible outcome.
If you have any questions or need personalised advice, feel free to contact us at NexGen Business & Tax Services Chartered Accountants. We’re here to help you manage your tax obligations and reduce your stress.
