Australian payslips carry a Medicare levy of 2% of taxable income, which funds the public health system and applies to almost everyone above a low income threshold. That part is straightforward.
What sits alongside it is more interesting. The Medicare levy surcharge is an additional charge of 1% to 1.5% that applies only to higher earners who do not hold an appropriate private hospital insurance policy. It is a tax with an explicit escape route, and the escape route is the point.
How the surcharge works
- It applies above an income threshold which is set separately for singles and for families, with the family threshold rising for each dependent child after the first.
- The rate rises in tiers as income increases, from 1% at the lowest surcharge tier to 1.5% at the highest.
- It is charged on the whole income, not the excess. Crossing the threshold by a dollar makes the surcharge payable on everything, which is a genuine cliff.
- It is avoided entirely by holding private hospital cover with an excess at or below the permitted level for the full year. Extras cover such as dental and optical does not count.
The income used is not simply taxable income. It is income for surcharge purposes, which adds back reportable fringe benefits, reportable employer superannuation contributions and net investment losses. This is the same broadened definition used for HELP repayment and it exists to prevent salary packaging from moving people under the threshold.
The arithmetic that makes it work
For someone earning above the first threshold, the surcharge is 1% of total income. On 110,000 dollars that is 1,100 a year. A basic private hospital policy with the maximum permitted excess typically costs less than that, and the premium is reduced further by the private health insurance rebate for those under the higher income tiers.
The result is that most Australians above the threshold hold hospital cover they may never use, which is precisely what the policy set out to achieve. Whether that is good health policy is argued about constantly. As a personal finance question it is settled: above the threshold, the insurance is cheaper.
Lifetime Health Cover loading
A second mechanism reinforces the first. Anyone who does not take out private hospital cover before a birthday in their early thirties pays a loading on their premium when they eventually do, rising for each year of delay and persisting for a decade of continuous cover.
For someone arriving in Australia in their late thirties, there is usually a grace period from the date of registration for Medicare, and missing it means paying the loading permanently for ten years. New arrivals should check the date, because it is one of the few deadlines in Australian personal finance with a lasting price attached.
How it appears on the return
The surcharge is not deducted through PAYG withholding. It is assessed on the annual return, which means someone who crossed the threshold during the year meets it as a bill rather than as a payslip deduction. Combined with a HELP debt, which behaves the same way, this is the most common reason an Australian employee ends the year owing money rather than receiving a refund.
The student loan side is covered in HECS-HELP repayments, and the interaction with packaging in salary packaging in Australia.
The levy and the surcharge both apply to income, so the starting point is your taxable position. Check it with the Australia Salary Calculator.