Australia’s Medicare system makes health care seem fairly easy that we probably forget it’s partially funded by a levy that most working Aussies pay.

Most people who work in Australia are subject to paying this levy. But while PAYG employees usually have their levy automatically deducted by their paycheck and paid by their employers, sole traders are responsible for calculating and paying this levy on their own as part of their tax return.

The formula is simple: the Medicare levy is 2% of a person’s taxable income. The Medicare levy is collected from employees in the same way income tax is collected. Generally, the pay as you go (PAYG) amount that an employer withholds from a salary or wages includes an amount to cover the Medicare levy. The Australian Taxation Office (ATO) does its calculations on the actual amount owed when an income tax return is lodged, but usually there will not be a big disparity.

As the Medicare levy is calculated at a simple flat rate, meaning how much you pay will depend on how much you earn. If you’re bringing in top dollars, you may also have to pay an additional surcharge on the levy.

The good news is that you can lessen the load by regularly putting aside money for the Medicare levy throughout the year, so you’re not hit with one huge bill you can’t cover.

What is the Medicare Levy?

The Medicare levy is a mandatory fee every working Australian (with some exceptions – see below), pays to the government to help fund the public health system.

The levy is on top of the tax you pay on your taxable income and GST.

What is the Medicare Levy Surcharge?

If you make above a certain amount as a single or as a family, you may be subject to the Medicare levy surcharge. This is in addition to the Medicare levy, not instead of it.

How does Private Health Insurance impact this?

If you are a high earner, and you take out a certain level of health insurance for yourself and your family, you may be exempt from paying the Medicare levy surcharge (see below).

It’s important to note that this exemption only applies to the Medicare levy surcharge, NOT the Medicare levy.

The Medicare Levy Surcharge (MLS) was created to encourage high earners to take out private healthcare, reducing the burden on the public health system – or pay a higher levy. Fair enough, eh?

The ATO uses a special definition of income called income for MLS purposes to figure out if you need to pay the MLS, and if so, at what rate you pay it. This is different from your taxable income alone, because it includes things like:

• Reportable fringe benefits

• Total net investment losses

• Reportable super contributions

• Income from a trust or partnership

• Dividends and property from a company, on which family trust distribution tax has been paid.

The MLS rates are charged at 1%, 1.25% or 1.5% on top of the standard 2% Medicare levy, depending on your MLS income total. If you have a spouse, your MLS income total will be calculated based on your joint (family) income.

Reductions & Exemptions

You’ll pay the levy at a reduced rate if:

Your taxable income is between $23,365-$29,207 ($36,925-$46,157 for seniors and pensioners eligible for the seniors and pensioners tax offset – SAPTO)

You won’t have to pay the levy at all if:

You earn $23,365 or less ($36,925 for those entitled to SAPTO)

Family income

You may also be eligible for a reduced levy rate depending on your family situation. The ATO takes into account family income, and whether you have dependents, when deciding if you’re eligible for a reduced Medicare levy rate. For example:

For the 2021/22 financial year, you’d pay a reduced levy rate if your family taxable income is between $39,402 and $49,252 ($64,251 if you’re entitled to the SAPTO).

The upper threshold increases by $4,523 for each dependent child you have.

The way the ATO calculates your family taxable income is based on either:

The combined taxable income of you and your married or de facto spouse (including a spouse who died during the year)

Or:

Your taxable income if you were the sole carer of one or more dependent children.

Other exemptions

Aside from the income threshold, you may also be exempt from paying the Medicare levy if:

• You’re not entitled to Medicare benefits

• You meet certain medical requirements

• You’re a foreign resident for tax purposes

You can check the Medicare Levy Calculator on the ATO website to ascertain any upcoming obligations (although this may not be accurate in some cases) so it’s best to check in with your accountant and get the low-down.

For help or advice get in touch with us here.