Understanding the Medicare Levy Surcharge can feel overwhelming, especially when you’re trying to figure out how it affects your business income and personal tax obligations. Many business owners are surprised to discover they’re liable for this additional tax, particularly when they receive directors’ fees or other business-related income that pushes them above the income thresholds.
How to Calculate Medicare Levy Surcharge and Why Does It Exist?
The Medicare Levy Surcharge serves as Australia’s way of encouraging higher-income earners to take responsibility for their healthcare costs while supporting the public system for those who need it most.
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How the Surcharge Works and Who Pays
The Medicare Levy Surcharge is an extra tax that applies to people earning higher incomes who don’t have private hospital insurance. It encourages these earners to get hospital cover, which helps reduce demand on public hospitals.
Unlike the standard Medicare Levy that most taxpayers pay at 2% of their taxable income, the MLS is an extra charge ranging from 1% to 1.5% of your income. The surcharge only applies to individuals earning above $101,000 annually or families with combined income exceeding $202,000 who don’t have appropriate level of private health insurance for the full financial year.
The income thresholds are tiered, with higher earners paying increased rates. For the current period, singles earning between $101,001 and $118,000 pay 1%, those earning $118,001 to $158,000 pay 1.25%, and those earning above $158,001 pay 1.5%.
Most taxpayers can use the ATO calculator to estimate their potential Medicare Levy Surcharge liability based on their personal circumstances. The calculations help you determine whether you need to pay the surcharge or if you’re exempt through appropriate private health insurance cover.
How the Medicare Levy Surcharge Affects Business Owners
Business owners often have complex income structures that can trigger the MLS in unexpected ways. The ATO uses a special calculation for MLS purposes which includes more than just your basic taxable income when determining if the surcharge applies.
For MLS purposes, your income is your taxable income plus: reportable fringe benefits, total net investment losses, and reportable super contributions (salary sacrifice and deductible personal).
Directors’ fees are assessable to the individual, subject to PAYG withholding and reported through STP.
Company Income vs Personal Liability
It’s crucial to understand that the Medicare Levy Surcharge applies to individuals, not companies. Even if your business operates through a company structure, any income you personally receive – whether as salary, directors’ fees, or distributions – contributes to your personal MLS liability.
Company directors often receive a combination of salary and directors’ fees. Both forms of payment count towards the income thresholds, meaning you need to consider your total personal income from all sources when determining if you need to pay the surcharge.
Trust distributions also count towards your Medicare income calculations. If you receive distributions from a family trust or other trust structure as part of your business arrangements, these amounts are included when the ATO determines your surcharge liability.
Smart Strategies to Avoid the Medicare Levy Surcharge
To avoid the MLS, hold hospital cover (not extras-only) for each day of the year, with an excess ≤ $750 (single) / ≤ $1,500 (family). For a single person, this means hospital cover with an excess of $750 or less, while families need cover with an excess of $1,500 or less.
If you have a spouse, both partners need to be covered under a family policy or separate policies that meet the requirements. The family threshold applies to combined income, so even if one partner earns below the single threshold, their combined income might still trigger the surcharge.
It’s important to note that extras cover alone won’t protect you from the Medicare Levy Surcharge – you specifically need hospital cover that meets the minimum requirements to be exempt from paying the additional tax.
Cost-Benefit Analysis
For many business owners, taking out private health insurance makes financial sense when you calculate the potential savings. If the annual premium for compliant hospital cover costs less than the 1% to 1.5% surcharge on your income, insurance becomes the cheaper option.
Example: a single taxpayer on $120,000 without appropriate hospital cover falls in the 1.25% tier, so the MLS is $1,500. If you can find appropriate hospital cover for less than this amount, you’re entitled to avoid the surcharge while gaining private healthcare services.
Use the Medicare calculator available on government websites to estimate your potential liability based on your specific income and family circumstances. This helps you make informed decisions about whether private health insurance or paying the surcharge works better for your situation.
Timing Considerations
The Medicare Levy Surcharge is calculated on a daily basis throughout the financial year. If you take out hospital cover partway through the period, you’ll only avoid the surcharge from the date coverage begins. This means last-minute insurance purchases before you lodge your tax return won’t eliminate the full year’s surcharge liability.
The Medicare system applies the surcharge proportionally, so if you have cover for half the year, you’ll pay the surcharge for the remaining six months when you lodge your return with the ATO.
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Business Structure Planning
Some business owners consider restructuring their affairs to manage MLS liability. However, this should be approached carefully with professional advice. The income thresholds for Medicare Levy Surcharge purposes capture many types of business income, making it difficult to avoid through structural changes alone.
Consider how different payment methods affect your Medicare calculations. Salary, directors’ fees, and trust distributions all count towards the threshold, while some business expenses and superannuation contributions might help reduce your assessable income for Medicare purposes.
Making Informed Decisions for Your Business
Understanding the Medicare Levy Surcharge helps you make better financial decisions for both your personal circumstances and business operations. If your business income regularly pushes you above the Medicare income thresholds, budgeting for either insurance premiums or the surcharge itself becomes an important part of your tax planning.
Consider reviewing your total income sources annually, including salary, directors’ fees, trust distributions, and investment income. This comprehensive view helps you accurately calculate your Medicare Levy Surcharge liability and make informed choices about private health insurance coverage.
The Medicare system recognises that family situations change, with different rates applying based on whether you’re single, have a spouse, or have dependants. Thresholds can change—check the ATO for the relevant income year before you lodge.
