Private health insurance and tax: How does it work?

We take a look at what government assistance is available to encourage Australians to take out private health insurance, as well as some possible tax implications if you do not have any cover.

What are the main private health insurance incentives and tax benefits provided by the Government?

To encourage Australians to take out and maintain private health insurance, which can ease the pressure on our Medicare system, the Federal Government offers several incentives, including two that may have an impact on your tax return:

1. the private health insurance rebate
2. the Medicare Levy Surcharge

1. The private health insurance rebate

The private health insurance rebate is an amount of money the government may contribute towards the cost of your private health insurance premiums. As the rebate is income-tested, the size of your rebate will reduce as your income increases, and once you earn over the maximum threshold you won’t be entitled to any rebate at all. According to the Australian Taxation Office (ATO), the rebate can be claimed on premiums paid for a private health insurance policy that includes, at the very least, a Basic tier of private patient hospital cover.

How much is the private health insurance rebate?

The rebate you receive from the government could be almost a third of your health cover premiums, but this will depend on your income and age, as well as your relationship and family situation.

Take a look at the table below to help estimate which tier you fall under, bearing in mind that single-parent households and couples fall into the “families” category. For families with children, the thresholds are increased by $1,500 for each child after the first. Note: if you are in a couple or family, the rebate is applied based on the age of the oldest person covered by the health insurance policy.

Rebate by income bracket

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Source: privatehealth.gov.au. Rebate levels applicable from 1 April 2021 until further notice, and income thresholds until 30 June 2021.

How do you claim the private health insurance rebate?

The ATO explains you can either claim your rebate via your income tax return at the end of a financial year, or by opting for reduced health insurance premiums. If you opt for reduced health insurance premiums, let your health insurer know and it should organise this for you. If you prefer to wait until the end of the financial year, the ATO says it will apply your rebate automatically once you input the details from your private health insurance tax statement into your tax return.

2. The Medicare Levy Surcharge

If you don’t have a certain level of private patient hospital cover and earn above $90,000 if you’re single or $180,000 as a family (including couples and single-parent households), then you are likely to pay the Medicare Levy Surcharge (MLS). This is a percentage of your income that will be payable to the Australian Taxation Office (ATO) when you lodge your tax return. The MLS was introduced to help ease the burden on the Medicare system by encouraging Australians on higher incomes to take out private health insurance. As the government’s PrivateHealth website explains, the MLS is different to the Medicare Levy, which applies to almost all Australian taxpayers. This means some taxpayers may need to pay both the Medicare Levy and the MLS.

According to the ATO, your income for MLS purposes is different to your taxable income. It includes your taxable income, plus some other considerations including fringe benefits, super contributions and your spouse’s income, if applicable. The ATO website includes a full list of these considerations, as well as a table you can use to work out whether you’ll have to pay the MLS, and if so, how much you may have to pay as a percentage of your income.

Medicare Levy Surcharge by income bracket

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Source: ATO, current as at April 2021 for the 2020-21 financial year.

What is the minimum level of hospital cover required to avoid the MLS and how much does it cost?

To avoid paying the MLS, your private health policy must include all of the following, as a minimum, according to the ATO:

• private patient hospital cover
• a maximum excess of $750 for singles and $1,500 for couples or families
• be provided by a registered health insurer, as listed on the PrivateHealth website.

The Basic tier of health insurance is the lowest level of hospital cover a fund can offer in Australia, and these policies are usually the minimum amount of coverage required to avoid the MLS. Keep in mind, the variety of treatments covered by policies in this tier tends to be fairly limited, and most can be offered on a restricted basis, meaning there are more scenarios where you may face out-of-pocket expenses if you require treatment at a hospital than with policies from other tiers.

If you’re comparing health insurance policies, the table below displays some of the hospital and extras policies currently available on Canstar’s database for a single female born in 1985 seeking cover in NSW without pregnancy cover. Please note the table is sorted by Star Rating (highest to lowest), followed by provider name (alphabetical) and features links direct to the providers’ websites. Use Canstar’s health insurance comparison selector to view a wide range of policies.

What are the average premiums for health insurance?

Canstar’s analysis of average annual hospital premiums by tier of cover is outlined in the tables below, factoring in the different tiers of the private health insurance rebate. These are based on the products in our database and are correct as at April 2021. You may like to check out the difference between various tiers of insurance to get a better idea of what treatment categories are included in each tier of hospital cover. Bear in mind that the rebate percentages listed below are for under-65s. If you or the oldest person on your health insurance policy is aged 65 or older, then you may be eligible for a higher rebate, as the ATO explains.

Table 1: Average annual hospital premiums by hospital tier: Base Rate applied

Source: www.canstar.com.au – 21/04/2021. Calculations are based on the average premiums for health insurance policies on Canstar’s database. National average premiums based on state averages weighted by state population of insured persons (APRA; Dec 2020). *The Australian Government Private Health Insurance Rebate, Base Tier for under 65s, of 24.608% has been applied to premiums. Average premium calculations are based on standalone hospital policies, excluding OSHC, Visitor and Corporate policies.

Table 2: Average annual hospital premiums by hospital tier: Tier 1 rebate applied

Source: www.canstar.com.au – 21/04/2021. Calculations are based on the average premiums for health insurance policies on Canstar’s database. National average premiums based on state averages weighted by state population of insured persons (APRA; Dec 2020). *The Australian Government Private Health Insurance Rebate, Tier 1 for under 65s, of 16.405% has been applied to premiums. Average premium calculations are based on standalone hospital policies, excluding OSHC, Visitor and Corporate policies.

Table 3: Average annual hospital premiums by hospital tier: Tier 2 rebate applied

Source: www.canstar.com.au – 21/04/2021. Calculations are based on the average premiums for health insurance policies on Canstar’s database. National average premiums based on state averages weighted by state population of insured persons (APRA; Dec 2020). *The Australian Government Private Health Insurance Rebate, Tier 2 for under 65s, of 8.202% has been applied to premiums. Average premium calculations are based on standalone hospital policies, excluding OSHC, Visitor and Corporate policies.

Table 4: Average annual hospital premiums by hospital tier: Tier 3 rebate applied

Source: www.canstar.com.au – 21/04/2021. Calculations are based on the average premiums for health insurance policies on Canstar’s database. National average premiums based on state averages weighted by state population of insured persons (APRA; Dec 2020). *The Australian Government Private Health Insurance Rebate, Tier 3 for under 65s, of 0% (no rebate) has been applied to premiums. Average premium calculations are based on standalone hospital policies, excluding OSHC, Visitor and Corporate policies.

Case studies: Is it more cost-effective to pay the MLS or the minimum level of hospital cover?

According to the ATO, if you are a single person aged under 60 without private health insurance, and you earn between $90,001 and $105,000 for MLS purposes, the MLS you would pay would be 1% of your income, so between $900 and $1,050. In comparison, the average premium for a Basic hospital policy for a single person on Canstar’s database is $1,003 (including the rebate of 16.405% for those earning between $90,001-105,000). Based on these calculations, the cost to you would be comparable either way, and therefore it really is a personal decision as to whether you prefer to have health insurance or pay the MLS.

Using ATO calculations, if you are part of a family with a combined income of $250,000 and don’t have private health insurance, your MLS would be $3,125. Compare this with the average annual premium for Basic family hospital cover, which according to our research is $2,126 at the time of writing (including a rebate of 8.202%), which is a difference of around $999 per year, plus a basic level of private hospital cover.

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Additional reporting by Elise Donaldson and Katie Rodwell.