Private health insurance and tax: How does it work?

If you have private health insurance then you may be able to claim back some of the money you’ve paid out as part of your tax return from the Australian Government.

Private health insurance payments aren’t tax deductible. But the government provides incentives to encourage you to take out some form of private health cover, that may benefit you at tax time.

What are the government incentives to take out private health insurance?

There are two main government incentives to encourage you to take out private health insurance, if you can afford it.

• the private health insurance rebate
• the Medicare Levy Surcharge

The private health insurance rebate may help you recover some of the money you’ve paid out for private health insurance premiums, whereas the Medicare levy surcharge may cost you money.

These are separate to the Medicare levy most Australians pay on their taxable income.

So let’s take a closer look at both.

What is 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.

The Australian Taxation Office (ATO) says your eligibility for the rebate depends on a number of things, such as the type of policy you take out and your income.

The rebate is income-tested so the amount of rebate you may be eligible for will depend upon how much you earn. The more you earn, the less your rebate. Once you earn more than the maximum threshold you won’t be entitled to any rebate at all.

Your income can depend on a number of things such as whether you have a single income or a family income. Your status as single or part of a family may vary during a financial year, so you may need to check which criteria may apply to you.

How much is the private health insurance rebate?

The private health insurance rebate you may be able to get from the government could be almost a third of your health cover premium.

The actual amount of the rebate will depend on a number of factors including your income and whether your policy cover is for you as a single person or as part of a family. Each adult covered by the policy is income tested.

The rebate also takes into account the age of the oldest person on an insurance policy, and the number of eligible children after the first child.

As a guide to the potential cut-off for any rebate, the ATO says the annual income thresholds for 2023–24 are earnings of $144,001 or more for a single person and $288,001 or more for a family.

You can use the ATO’s private health insurance rebate calculator to help you work out what your rebate may be. But use this as only a guide, your actual rebate may be different and subject to change, including any change to you or your family circumstances throughout the financial year.

How do I claim the private health insurance rebate?

You can claim your rebate either by opting for reduced health insurance premiums or via your annual tax return at the end of a financial year, according to the ATO.

If you opt to claim as part of your annual tax return then the ATO will work out how much of a rebate you may be entitled to as a tax offset.

If you’ve already claimed a rebate via reduced premiums then the ATO will work out if you’ve paid too much or too little, then make any necessary adjustments as part of your tax assessment.

If more than one adult is covered by a private health insurance policy then the amount of premium each pays is divided out equally, regardless of who actually paid.

What is the Medicare Levy Surcharge?

If you don’t have a certain level of private patient hospital cover and you do earn above a certain income then the ATO says you may have to pay a Medicare Levy Surcharge (MLS). This is a percentage of your taxable income and payable to the ATO when you lodge your tax return.

You won’t pay the MLS if your annual income is less than the base income threshold, which is $90,000 for singles and $180,000 (plus $1,500 for each dependent child after the first one) for families.

Earn above that threshold and if you don’t have an appropriate level of cover then you may be liable for the MLS of 1%, 1.25% or 1.5% levied on whatever the ATO determines as your income for MLS purposes. This is in addition to any Medicare levy you pay.

The ATO says for an appropriate level of private patient cover you must have an excess of $750 or less for singles, and $1,500 or less for couples or families. Any extras cover in your policy is not regarded as private patient hospital cover.

The ATO says it will work out if you have to pay the MLS based on the information you provide in your annual tax return.

So when it comes to private health insurance and your tax, whether it’s a rebate or a levy, most of the hard work is usually done for you by the ATO when you submit your annual tax return.

Cover image source: Monster Ztudio/Shutterstock.com