ATO Income Thresholds for the Medicare Levy Surcharge Explained

2024-25 Financial Year Thresholds

For the current 2024-25 financial year, the income thresholds are structured across four tiers:

2025-26 Financial Year Changes

The thresholds increase annually to reflect changes in average earnings. For the 2025-26 financial year starting 1 July 2025, the new thresholds are:

Family Income Threshold Adjustments

For families with dependants, the family income threshold increases by $1,500 for each dependant child after the first. This means a family with two children would have their threshold increased by $1,500, making their base threshold $195,500 for the 2024-25 financial year.

Single parents receive the same family threshold benefits as couples, recognising the additional financial responsibilities they face. Your first child doesn’t change the base family threshold, but each additional dependant child provides this $1,500 increase.

How to Calculate Your Income for Medicare Levy Surcharge Purposes

Understanding how to calculate medicare levy surcharge starts with knowing what income counts for MLS purposes. This calculation includes more than just your regular taxable income and affects how much tax you’ll pay.

The Medicare Levy Surcharge calculator considers your total economic capacity, not just your salary or wages. This broader definition ensures the levy surcharge applies fairly across different income types and prevents people from artificially reducing their liability through certain financial arrangements.

Components of Income for MLS Purposes

Your income for MLS purposes includes several components beyond your standard taxable income:

• Taxable Income: This includes salary, wages, business income, investment income, and other income reported on your tax return.

• Reportable Fringe Benefits: Any fringe benefits provided by your employer that exceed a certain amount annually must be included in your income calculation.

• Reportable Superannuation Contributions: This includes salary sacrifice contributions and other reportable super contributions that exceed the standard caps.

• Net Investment Losses: Investment losses that reduce your taxable income are added back for MLS calculation purposes, ensuring these losses don’t artificially lower your income threshold assessment.

Practical Calculation Example

Here’s how the calculation works in practice. Tom, a 35-year-old single person, has taxable income of $90,000 but also receives $27,000 in reportable fringe benefits. His income for MLS purposes becomes $117,000, placing him in Tier 1 with a 1% surcharge rate.

Tom’s Medicare Levy Surcharge would be $1,170, calculated on his total MLS income. This demonstrates how fringe benefits can push you into a higher threshold even when your taxable income alone wouldn’t trigger the surcharge.

Family Income Calculations

For couples and families, the calculation combines both partners’ income for MLS purposes, regardless of whether they lodge separate tax returns. This combined approach prevents income splitting strategies from avoiding the Medicare Levy Surcharge.

Your spouse’s income is included even if they don’t work or have minimal income. This family-based approach recognises that household financial capacity, rather than individual income, determines your ability to afford private hospital insurance.

Strategies to Avoid Paying the Medicare Levy Surcharge

There are several practical strategies you can use to avoid paying the MLS, with private hospital cover being the most common and effective approach for most people earning above the income thresholds.

The key to avoiding paying extra tax lies in understanding what type of cover you need and ensuring you maintain it for the full financial year. Many Australians find that the cost of basic hospital cover is less than the Medicare Levy Surcharge they would otherwise pay.

Private Hospital Cover Requirements

To avoid the MLS through private health insurance, your policy must meet specific criteria:

• Hospital Cover Only: You need hospital cover that includes treatment in Australian hospitals. Private health insurance that only covers extras won’t help you avoid the surcharge.

• Excess Limits: Your policy excess must not exceed $750 for singles or $1,500 for families. Higher excess policies won’t qualify you for the exemption.

• Full Financial Year Coverage: You must maintain appropriate level cover for the entire 365 days of the financial year. If you only have cover for part of the period, you’ll pay the surcharge for the uncovered days.

• Registered Health Fund: Your policy must be with a registered Australian health insurer that offers eligible hospital cover.

Cost-Benefit Analysis

For many people, even basic hospital cover costs less than the MLS they would otherwise pay. Someone earning $102,000 would pay $1,020 in Medicare Levy Surcharge, while basic hospital cover might cost around $1,165 annually but provide actual health benefits.

The calculation becomes more favourable as your income increases. At higher income levels, the 1.25% or 1.5% surcharge rates make private hospital insurance a clear financial winner, even before considering the health benefits and potential tax offset opportunities.

Income Management Strategies

While less common, some legitimate income management strategies can help reduce your MLS liability:

• Superannuation Contributions: Increasing contributions to superannuation can help manage your taxable income, though you need to consider the impact on reportable contributions for MLS purposes.

• Investment Timing: Careful timing of investment sales and purchases can help manage your taxable income across different periods, though this requires careful planning and professional advice.

• Professional Advice: Given the complexity of MLS calculations and their interaction with other tax planning strategies, professional accounting advice is often worthwhile for higher-income earners.

Who Can Claim Exemptions from the Medicare Levy Surcharge

Several categories of people can claim exemptions from both the Medicare Levy and the MLS, though these exemptions are quite specific and require meeting particular criteria based on your personal circumstances.

Understanding these exemptions can help you determine whether you need to take action to avoid the surcharge or whether you may already qualify for relief. The exemptions recognise that certain groups may not have access to Medicare services or may have alternative healthcare arrangements.

Medical Condition Exemptions

People with certain medical conditions may qualify for exemptions from both the Medicare Levy and MLS:

• Veterans’ Affairs Gold Card Holders: If you hold a Veterans’ Affairs card that entitles you to free medical treatment for all conditions through government services.

• Specific Medical Conditions: Those who qualify under specific medical condition criteria set by the Australian Taxation Office.

• Defence Force Personnel: Members of the Australian Defence Force whose healthcare is covered through Defence Force arrangements may qualify for exemptions.

Residency-Based Exemptions

Your residency status can also affect your MLS liability:

• Overseas Visitors: People living in Australia temporarily on certain visas may not be eligible for Medicare and therefore exempt from the levy and surcharge.

• Foreign Residents: If you’re considered a foreign resident for tax purposes during any period of the financial year, you may be exempt from the MLS for that period.

• Partial Year Residents: If you move to or from Australia during the financial year, you may qualify for a partial exemption covering the period you weren’t an Australian resident.

Income-Based Exemptions

Lower-income earners are automatically exempt from the MLS simply by being below the income thresholds. For the Medicare Levy itself, additional low-income thresholds apply that are separate from the MLS thresholds.

New members to private health insurance may also receive certain benefits or promotional offers that can help reduce the cost of obtaining appropriate cover to avoid the surcharge.

Conclusion

The ATO income thresholds for the Medicare Levy Surcharge create clear financial incentives for higher-income earners to maintain private hospital cover. With thresholds starting at $97,000 for singles and $194,000 for families in 2024-25, and increasing to $101,000 and $202,000 respectively in 2025-26, many Australian families need to consider their health insurance decisions carefully.

The tiered structure means surcharge rates range from 1% to 1.5% of your total income for MLS purposes, which often makes appropriate private hospital cover a financially smart choice. By maintaining cover that meets the requirements throughout the full financial year, you can avoid these additional tax costs while securing valuable health benefits for you and your family.

Take time to review your current income projections and health insurance arrangements before the end of the financial year. If you’re approaching the income thresholds or already above them, speaking with a qualified tax professional can help you understand your obligations and examine the best strategies for your specific situation.