Save tax by getting private health insurance before June 30th.

Save Tax by Getting Private Health Insurance Before June 30th

Private health insurance has become a prevalent topic, especially when it comes to saving tax in Australia. With the end of the financial year looming, it’s common to see a surge in advertisements and media campaigns promoting private health insurance as a key strategy to reduce your tax bill. But how effective is this tactic? While there are some tax benefits for individuals earning above certain thresholds, the reality is that for most Australians, taking out private health insurance solely for tax purposes may not provide substantial savings.

In this article, we will explore the tax implications associated with private health insurance and assess whether it’s a worthwhile investment for your tax-saving strategy. We will cover key concepts such as the Medicare Levy Surcharge (MLS), income thresholds, and the Adjusted Taxable Income (ATI) that determines your liability. By the end of this post, you’ll have a better understanding of whether private health insurance can truly help you save tax and, more importantly, whether it’s the right decision for your circumstances.

What Is Private Health Insurance?

Before diving into the tax considerations, it’s important to understand what private health insurance entails. Private health insurance is an optional form of healthcare coverage that Australians can purchase to supplement their Medicare coverage. Essentially, it offers additional services and quicker access to private hospital care, which Medicare alone might not fully cover.

There are two main types of private health insurance policies:

1. Hospital Cover – This insurance covers the costs of being treated as a private patient in a hospital. It provides you with a choice of doctors and hospitals, potentially reduces wait times, and covers treatments not fully supported by Medicare. Importantly, hospital cover can also help you avoid paying the Medicare Levy Surcharge.
2. Extras Cover – This covers a range of services not covered by Medicare, such as dental, optical, physiotherapy, and chiropractic services. While it offers health-related benefits, extras cover does not provide tax savings and is irrelevant to the Medicare Levy Surcharge.

It’s crucial to note that if you’re considering private health insurance purely for tax purposes, you’ll only need to look at hospital cover. While useful for additional health services, extras cover does not provide any tax-related benefits.

What Is the Medicare Levy Surcharge (MLS) for 2024 to 2025?

The Medicare Levy Surcharge is an additional tax levied on high-income earners who do not have private health insurance hospital cover. This surcharge is designed to incentivise individuals and families with higher incomes to take out private hospital cover and thereby ease the demand on the public health system.

The MLS operates on a tiered system based on your annual income. If your income exceeds certain thresholds and you don’t have eligible private hospital cover, you will need to pay the surcharge. Here’s a breakdown of how the MLS applies:

• For singles earning more than $90,000 annually, the surcharge kicks in if you don’t have hospital cover.
• For families earning over $180,000, the surcharge applies if none of the family members have private hospital cover.

The surcharge is calculated as a percentage of your income and increases progressively based on how much you earn. It ranges from 1% to 1.5% depending on your income bracket:

The MLS is applied to your Adjusted Taxable Income (ATI), which we will explain in more detail below.

Understanding Adjusted Taxable Income (ATI)

The Medicare Levy Surcharge is not based on your gross income or the taxable income figure you might be familiar with from your tax return. Instead, it’s based on your Adjusted Taxable Income (ATI), a broader measure of income used by the Australian Taxation Office (ATO) to determine eligibility for various tax obligations and benefits.

ATI includes your taxable income, but it also factors in other amounts that aren’t always visible on your tax return. These include:

• Reportable superannuation contributions, such as salary-sacrificed amounts into your superannuation fund.
• Fringe benefits – If your employer provides non-cash benefits, like a car or housing, the grossed-up value of these benefits is added back into your ATI.
• Investment losses – If you have negative gearing or other net investment losses, these are added back to calculate your ATI.
• Foreign income that may not have been included in your taxable income, but which forms part of your broader earnings.

Because ATI paints a more complete picture of your financial resources, it can push many people into higher income brackets for the Medicare Levy Surcharge. For example, if your taxable income is $90,000, but you make significant salary-sacrificed superannuation contributions and have investment losses, your ATI might exceed the $97,000 threshold, causing you to pay the surcharge.

Is Private Health Insurance Worth the Tax Savings?

Now that you understand how the Medicare Levy Surcharge works and how ATI is calculated, the next question is whether taking out private health insurance hospital cover is a smart tax-saving move.

If your income is below the $97,000 threshold for singles or $194,000 for families, the short answer is no—you won’t pay the MLS, and therefore, you won’t save any tax by getting hospital cover. However, if your ATI is above these thresholds, hospital cover may help you avoid the surcharge and, consequently, reduce your overall tax bill.

Here’s a hypothetical example to illustrate this:

• John is single and earns $100,000 per year in taxable income.
• Without private hospital cover, John would need to pay a 1% MLS, which equates to $1000.

If John takes out a basic hospital cover policy that costs $800 annually, he would avoid the MLS and save $200 ($1000 MLS – $800 premium = $200 saved). For John, purchasing private hospital cover makes financial sense from a tax perspective.

On the other hand, if your income is slightly above the threshold, you may want to evaluate whether the cost of private health insurance premiums outweighs the savings from avoiding the surcharge. In some cases, especially for those closer to the income thresholds, the cost of hospital cover may exceed the potential MLS liability.

Timing Is Key: Why June 30 Matters

If you’re considering taking out private health insurance to avoid the Medicare Levy Surcharge, the timing of your purchase is critical. To reduce or eliminate the surcharge for the financial year, you must have hospital cover in place for the relevant period. Importantly, hospital cover will not be applied retroactively to the start of the financial year, it will only provide benefits from the date the cover is initiated. This means if you purchase hospital cover just before June 30, it will only protect you from the surcharge moving forward, not for any earlier part of the year. To maximise the potential tax savings and avoid the surcharge for the entire year, it’s best to take out private health insurance as early as possible within the financial year.

Conclusion: Weighing the Costs and Benefits

Private health insurance can be a helpful tax-saving tool for high-income earners, but it’s not a one-size-fits-all solution. While hospital cover can help you avoid the Medicare Levy Surcharge, it’s important to weigh this against the cost of premiums, especially if your income is only marginally over the relevant threshold.

For many Australians, the true value of private health insurance comes down to the healthcare benefits it provides, rather than the tax savings. If you’re primarily motivated by tax benefits, carefully assess your Adjusted Taxable Income, the cost of hospital cover, and the likelihood of needing private health services in the near future.

Finally, remember that tax savings should never be the sole reason for purchasing insurance. Consider your health needs, family situation, and long-term financial goals when deciding whether private health insurance is the right choice for you.