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Health insurance for tax purposes

Want to know how health insurance and tax works? Find out all you need to know about the relevant government incentives and penalties

The Australian government provides a range of incentives (and penalties) to encourage more people to take out private hospital cover. This is done either through the taxation system or by raising your health insurance premiums when you take out a policy.

This guide looks at the various carrots and sticks in more detail, along with other ways you can reduce the cost of your private health insurance.

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What is the relationship between health insurance and tax?

Two of the government incentives to encourage greater take-up of private health cover involve taxation:

  • The Private Health Insurance Rebate. The Private Health Insurance Rebate provides a rebate at tax time of up to 35% for lower to middle income groups to help them pay for their private health insurance.
  • The Medicare Levy Surcharge (MLS). The MLS is an annual tax of between 1% and 1.5% on higher income earners who don’t have an adequate level of private hospital cover.

The third government strategy for improving private hospital take-up is not a tax, but a premium increase:

The reason for these incentives and penalties is to try and encourage more people to take out private health insurance to relieve the pressure on the public health system. So let’s examine each of these incentives in more detail and the extent to which they achieve this goal.

Private Health Insurance Rebate

The Private Health Insurance Rebate provides a good incentive for those on lower to middle incomes to maintain their private health cover. The less you earn, the more you get back and lower income earners can receive a rebate of up to 35%, which represents a sizeable saving on insurance premiums.

  • The rebate levels listed below are applicable from 1 April 2016 to 31 March 2017.
  • If your income is higher than $140,001 no rebate applies.
Age groupIncome of $90,000 or lessIncome of $90,000 to $105,000Income of $105,001 to $140,000
60 or younger26.79%17.86%8.93%
65 to 6931.26%22.33%13.40%
70 or older35.72%26.79%17.86%

Source: Private Health Insurance Ombudsman website

  • The rebate levels listed below are applicable from 1 April 2016 to 31 March 2017.
  • If your income is higher than $280,001 no rebate applies.
Age groupIncome of $180,000 or lessIncome of $180,000 to $105,000Income of $210,001 to $280,000
60 or younger26.79%17.86%8.93%
65 to 6931.26%22.33%13.40%
70 or older35.72%26.79%17.86%

Source: Private Health Insurance Ombudsman website

You can receive this either as a tax rebate on the eligible percentage of your health insurance premiums, or your health fund can apply the rebate directly to your premiums, reducing the amount you pay.

While the rebate provides a good incentive, the downside is that the amount you get back depends on the annual CPI increase applied to private health insurance every year. As this is usually a growth in premium costs of around 5% p.a., it means your rebate can be eroded by inflation over time.

Medicare Levy Surcharge

The MLS is a tax of between 1% and 1.5% of your total annual income. It’s an additional tax on top of the Medicare Levy that everyone pays, but is only paid by those who earn above a certain income and who don’t have adequate private hospital cover.

  • Surcharge only applies once you begin to earn over a certain level, and increases as you reach higher income thresholds which are listed below.
$90,000 or less$90,001 to $105,000$105,001 to $140,000$140,001 or more
No surcharge applies1.00% surcharge1.25% surcharge2.00% surcharge

Source: Australian Taxation Office website

  • Surcharge only applies once you begin to earn over a certain level, and increases as you reach higher income thresholds which are listed below.
 $180,000 or less$180,001 to $210,000$210,001 to $280,000$280,001 or more
No surcharge applies1.00% surcharge1.25% surcharge2.00% surcharge

Source: Australian Taxation Office website

In order to avoid the surcharge your must have adequate hospital insurance which meets the following criteria:

  • Must cover some or all hospital fees and charges.
  • For singles the policies excess must not exceed $500 per annum.
  • For families the policies excess must not exceed $1,000 per annum.

The drawback of this incentive in terms of encouraging people to pay for private cover and take the weight off the public system is that “adequate” hospital cover normally costs less than the 1% tax. So many high income earners simply take out a basic cover policy to save money (sometimes known as “junk” policies) and continue to use the public health system if they require hospital treatment.

Lifetime Health Cover loading

The Lifetime Health Cover (LHC) loading is designed to encourage people to take out private health cover early in life and to maintain it as they grow older. It applies a 2% loading on your health fund premiums for every year after your 31st birthday that you don’t have adequate cover until it caps at a maximum of 70%. This can add up to a substantial increase if you delay taking out health insurance. For example:

  • Taking out cover at 40 will result in your premiums being 20% more expensive.
  • Taking out cover at 50 will result in your premiums being 40% more expensive.

To give you an idea of how much the percentage increase can cost you in dollars, this chart displays the additional amounts you will have to pay at different life stages, using a baseline premium rate of $800.

The idea behind this is not only to create an incentive to take out health cover early, but also to create a disincentive to delay taking out cover. If everyone were to wait until they were older and more likely to need health cover, then the health insurance industry would quickly collapse as the cost of claims overtook the insurers’ revenue base from premium payments.

The downside is that for those who couldn’t afford private health insurance when the incentive was first introduced, it simply becomes even more unaffordable year after year.

What is the Lifetime Health Cover Base Date?

This is the date from which the loading will be applied if you have not taken out an adequate hospital insurance policy, which is the 1st of July following your 31st birthday.

Are there any other ways to reduce my health insurance costs?

As well as saving on tax and avoiding penalties, there are a number of other ways to reduce the cost of health insurance premiums, such as:

    • Renewing your policy before 31 March every year to avoid the CPI premium increase and to lock in your cover at its current rate for another year.
    • Reviewing your policy regularly and switching providers if you find a better deal elsewhere.
    • Customising your policy to ensure that you only pay for hospital cover that you will actually use (e.g. pregnancy services if you are single) and extras that give you the most value (e.g. optical, dental and physio).
    • Paying your premiums annually and by direct debit, as many insurers will offer a discount for less administration costs.
    • Increasing your excesses on hospital and extras cover to reduce the cost of your premiums, but make sure you can afford it.
    • By joining a restricted membership health fund (if eligible), where premiums can be cheaper and the benefits higher.
    • Looking for a fund that offers family benefits such as no hospital excess and gap-free extras cover for children if you have a family.

Compare health insurance options from Australian providers

Details Features
High Hospital with $0 / $250/ $500 Excess Options
High Hospital with $0 / $250/ $500 Excess Options
Provides a high level of cover for hospital including pregnancy cover and assisted reproductive services.
  • Cover starting from $36.22 weekly
  • Two month waiting period for wisdom teeth
  • 65% back on extras
  • Choice of $0, $250 and $500 excess
Enquire Now More info
Premier Hospital
Premier Hospital
This top hospital policy covers you for a multitude of services as well as 100% of the cost of hospital accommodation and theatre fees in all HCI agreement hospitals and day surgery facilities.
  • Cover for pregnancy and IVF treatment
  • 100% back on surgically implanted prostheses
  • 100% back on hospital prescriptions
  • Access Gap Cover
Get Quote More info
GoldStar
GoldStar
Premium hospital cover with complete cover for hospital expenses. Save 4% when you pay for 12 months of your cover upfront.
  • All theatre fees covered
  • Unlimited maternity cover
  • Choose no excess or $200, $400, $500 per admission
Get Quote More info
Top hospital 500
Top hospital 500
Top hospital 500 provides cover for a comprehensive range of services from psych to obstetrics to the removal of tonsils.
  • Spinal fusion
  • Weight loss surgery
  • All joint replacements
  • Rehabilitation
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Mid Hospital with Pregnancy
Mid Hospital with Pregnancy
Mid Hospital with Pregnancy covers you for pregnancy and related services in addition to what the standard Mid Hospital policy covers.
  • Pregnancy and related services
  • Nine month waiting period for pregnancy in public hospital
  • 12 month waiting period for pregnancy in private hospital
  • Day surgeries
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Premium Family Package
Premium Family Package
This is GMHBA's most comprehensive policy and providing a range of benefits including a pregnancy option.
  • Pregnancy and birth related services
  • Assisted reproductive services (IVF)
  • No hospital excess for kids
  • 100% back on optical
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Premium Hospital Cover
Premium Hospital Cover
Comprehensive hospital protection with complete cover including pregnancy.
  • No excess for kids
  • No excess for accidents
  • Cover for pregnancy, heart surgery, joint investigations
  • Free access to health and wellbeing programs
Enquire Now More info
Top Hospital Cover
Top Hospital Cover
NIB's premier Hospital protection with cover for pregnancy and birth services, obesity surgery and all other benefits covered across other policies.
  • $250 / $500 excess
  • Pregnancy and birth services cover
  • Infertility Investigations cover
  • Renal dialysis cover
Enquire Now More info
Top Hospital with Top Extras
Top Hospital with Top Extras
Get comprehensive hospital and extras cover and tailor your policy to your needs.
  • Pregnancy and birth services cover
  • Back surgery cover
  • $1000 general dental annual limit
  • $600 physiotherapy annual limit
Enquire Now More info

Picture: Shutterstock

Richard Laycock

Richard is the senior insurance writer at finder.com.au and is on a mission to make insurance easier to understand.

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