Currently, the Australian Government provides incentives for taxpayers to purchase Private Health Insurance cover to assist with the cost of medical expenses. These incentives, known as the Private Health Insurance Rebate, results in the Government contributing between 30% to 40% of the cost the premium dependant on your age and circumstances. The current method is a carrot and stick approach; whilst the Government provides incentives to take out Private Health insurance, it punishes the higher income earners who fail to do so with an additional tax ("the Medicare levy surcharge").
From 1 July 2012, this rebate and the Medicare levy surcharge will be means tested against three new income thresholds. Accordingly, the amount of rebate you will be entitled to will reduce if your income exceeds certain levels. Further, the level of surcharge levied on those who fail to take out private health cover will increase depending on income.
This table outlines the new rebate and surcharge levels based on income levels and age.
By way of example, if the aggregated taxable income for your family is $200,000 and you are aged 50, then the level of rebate available on premiums paid after 1 July 2012 is 10%. Failure to take out adequate cover will result in a 1.25% surcharge being applied to your taxable income on your Notice of Assessment when you tax return is lodged for that year.
There are a few things that you need to consider as a result of these changes.
Despite these changes, if you are currently claiming the full 30% rebate with your health fund, they will continue to reduce your premiums by 30% on amounts paid after 1 July 2012 irrespective of whether you are entitled to it or not. As the actual amount of the rebate you are entitled to will only be determined when you lodge your tax return, you maybe required to repay some or the entire amount of premium reduction you have received in your ongoing payments. If you have claimed the incorrect level of rebate as determined when you lodge your tax return, an adjustment will be made in your Notice of Assessment when your eligibility to the rebate (or application of the surcharge) is assessed.
To avoid the potential repayment of the incorrect reduction in health fund premiums, consider whether the changes to the rebate will reduce the percentage reduction you would be entitled to. If you are affected, you can ask your health fund to apply the correct premium reduction based on your age and income. This approach will mitigate the risk of having to repay a lump sum at year end for an excessive rebate claim.
Until now, some taxpayers have not taken out Private Health insurance despite the incentive of the rebate and the punishment of additional tax. However, the new rules may make the prospect of a higher Medicare levy surcharge incentive enough to entice those taxpayers to take out a policy. In this circumstance, it is necessary for the taxpayer to consider all aspects of the trade off between Private Health Insurance and the Medicare Levy Surcharge including their age, income, the levy likely to apply, the level of rebate and the cost of taking out an adequate policy.
There has been much speculation as to whether prepaying your policy for future year(s) prior to 30 June 2012 will allow all taxpayers to obtain a 30% reduction under the current rules on that payment irrespective of the fact it provides cover for a time period subject to the new regime.
Both the ATO and health funds that we have spoken to have confirmed that payments made prior to 30 June 2012, irrespective of the period it covers, will be subject to the current rebate rules, not the new regime. Our enquiries suggest that some health funds are offering the ability to prepay up to 18 months in advance. This will allow some taxpayers to obtain a 30% rebate on premiums for policies covering future periods when their age or income may prevent them from doing so if the payment was made after 1 July 2012.
For example, if you are 50 years old, your aggregated family income is $300k and you have comprehensive health cover for the family with a gross premium of $4,500 per annum, by prepaying prior to 30 June 2012, you would be eligible for the full 30% rebate resulting in a net cost to you of $3,150 - a saving of $1,350. Making the same premium payment after 1 July 2012 will result in no rebate and the full gross premium of $4,500 being payable.
If this arrangement is applicable to you, we suggest you speak to your health fund in relation to the matter as different funds are offering different arrangements in relation to these payments.
These new rules make existing rules even more confusing and complex. Further, it is evident that without a bit of planning now, there could be unexpected liabilities in the future or opportunities for savings missed. To avoid unexpected outcomes down the track, we encourage you to consider your circumstances now and if you need assistance, contact our office to assess how these changes apply to you.
Published 20 June 2012