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Is Health Insurance Tax Deductible?

Health insurance tax: Find out how what you need to know about private health insurance and tax.

The Australian Tax Office (ATO) provides both incentives and penalties in relation to private hospital cover. The aim is to encourage more Australians to take out health insurance to relieve the pressure on the public system.

This guide looks at the carrots and sticks being employed, along with other ways to reduce the growing cost of private health.

What is the private health insurance rebate?

The Private Health Insurance Rebate is the biggest incentive for taking out health cover. At a maximum of 30%, it represents a sizeable saving on premiums and how much you get back is based on how much you earn. But is health insurance tax deductible?

Yes. You can receive your rebate in two ways:

  • A tax rebate. Deduct the eligible percentage of your health insurance premiums from your tax return.
  • Reduced premiums. Your health fund can apply the rebate to your premiums, which lowers the price you're charged.

The downside of the rebate is that it can be eroded by inflation. If your insurer’s annual premium increase is higher than the current CPI (and most are of late), then the rebate is reduced, meaning you won’t get as much back.

The rebate levels applicable from 1 April 2016 to 31 March 2017 are:

Rebate

Singles≤$90,000$90,001-105,000$105,001-140,000≥$140,001
< Age 65
26.791%
17.861%
8.930%
0%
Age 65-69
31.256%
22.326%
13.395%
0%
Age 70+
35.722%
26.791%
17.861%
0%
Families≤$180,000$180,001-210,000$210,001-280,000≥$280,001
< Age 65
26.791%
17.861%
8.930%
0%
Age 65-69
31.256%
22.326%
13.395%
0%
Age 70+
35.722%
26.791%
17.861%
0%

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Government incentives for health insurance

Private health insurance has several tax implications, both good and not-so-good for the average person. On the good side, there is a substantial tax incentive to help reduce the cost of premiums. This is known as the Private Health Insurance Rebate and it provides a tax rebate based on your age, your level of income and the number of dependants you have.

On the not-so-good side (depending on which side of the fence you are on), there are two main government initiatives designed to encourage everyone to take out private health cover (in particular hospital cover) and these are known as the Medicare Levy Surcharge (MLS) and the Lifetime Health Cover (LHC) loading.

  • Medicare Levy Surcharge (MLS). The MLS is an additional tax on top of the normal 2% Medicare Levy, which those people earning over $90,000 (families $180,000) must pay if they do not have adequate hospital cover. It is designed to help reduce the burden on the public hospital system by encouraging those who can most afford it to take out private health cover.
  • Lifetime Health Cover (LHC) loading. The LHC loading is also designed to encourage more people to take out private hospital cover and the earlier the better. It is a 2% loading that you must pay for every year over the age of 30 that you do not have adequate hospital cover. It encourages those who are younger to take out and maintain health cover from an early age to avoid paying the extra loading, which is capped at 70%.

Given these incentives and penalties, the way to save tax on health insurance is to get the largest rebate you are entitled to and avoid paying the extra loadings of the MLS and LHC if possible.

About the Medicare Levy Surcharge (MLS)

The MLS is an additional tax on top of the 2% Medicare Levy that everyone is required to pay. You are charged between 1% and 1.5% of your total annual income if you earn above a certain threshold, but only if you don’t have adequate private hospital cover.

For instance, if you are an individual earning $90,000 a year and you don’t have hospital cover, you’ll pay an extra $900 tax (1% of your annual income). This increases to 1.25% if you earn more than $105,000 ($210,000 for families) and to 1.5% if you earn more than $140,000 ($280,000 for families).

Adequate hospital cover is defined as cover held with a registered health fund that covers some or all hospital fees and charges, with an excess payable by you of no more than $500 pa for singles and $1,000 pa for couples and families. As adequate hospital cover can usually be obtained for less than the 1% tax on a $90,000+ income, it makes sense for those liable for the MLS to take out cover and actually save money by doing so.

Medicare levy surcharge income testing

Singles≤$90,000$90,001-105,000$105,001-140,000≥$140,001
All ages
0.0%
1.0%
1.25%
1.5%
Families≤$180,000$180,001-210,000$210,001-280,000≥$280,001
All ages
0.0%
1.0%
1.25%
1.5%

How can I save on my health insurance premiums?

As well as saving on tax, there are other more general ways to save on the cost of your health insurance premiums. These include:

  • Joining or renewing your health cover before 31 March each year to postpone the annual CPI price increase and lock your cover in at the current price for the year.
  • Reviewing your policy regularly to take advantage of special offers and switching to another provider if they are offering a better deal.
  • Avoiding the MLS if you earn over a certain amount by taking out an adequate level of basic hospital cover.
  • Joining a health fund before you turn 31 to ensure you get cover at the lowest possible rate (without the 2% a year LHC surcharge).
  • Tailoring your policy to ensure that you only pay for extras you get the most value from (e.g. optical, dental, physio) and hospital cover that you will use (e.g. you may no longer need pregnancy or IVF cover).
  • Paying your premiums in advance and by direct debit (many insurers offer discounts for this).
  • Increasing the excess that you pay towards hospital and extras cover (the higher the excess, the lower the premium), but making sure you can afford it if the money is required at short notice.
  • Joining a restricted membership health fund if you are eligible such as an industry or super fund, where premiums are often cheaper and benefits higher for members.
  • If you have dependants, switching to a fund that offers perks for families such as no hospital excess and gap-free extras cover for children.

Health insurance premium rate rise

As mentioned previously, insurers increase their premium rates every year on 1 April. They do this, not to make higher profits, but to keep up with the ever increasing cost of medical treatment. The amount of the increase can vary considerably by insurer (it can be as low as 3% or as high as 9%), but it generally averages out to around 5 or 6% pa.

While this rate rise is inevitable, given the inevitable rise in medical costs, there are ways to reduce the impact on your premiums. The short term way, as discussed previously, is to pay your premium before 1 April to lock in the old rate for another year. A more long term strategy is to shop around between insurers to find one that provides the same cover you have now, but with a cheaper premium due to a lower rate rise.

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