You need to know how the Medicare Levy Surcharge works

Australia's tax system encourages high-income earners to take out private health insurance.

It does this by charging a tax supplement (on top of the normal 2% Medicare levy) on high-income earners who don't have private health cover.

This is called the Medicare Levy Surcharge (MLS).

If your income exceeds the relevant income threshold and you do not have an appropriate level of private patient hospital cover for the full year, you are liable to pay the surcharge.

The income threshold that the surcharge kicks in at changes depending on whether you are single or have dependents (2024/25 figures):

For families, the income thresholds increase by $1500 for each dependent child after the first.

Example: The Smith family has five dependent children so their family surcharge threshold is $200,000 (being $194,000 + ($1500 x (5-1)).

For MLS purposes, you are a member of a family if, during any period of the year, you:

• had a spouse or a child who was an Australian resident (regardless of their income), and
• contributed to their maintenance.

Your spouse includes another person (of any sex) who either:

• you were in a relationship with that was registered under a prescribed state or territory law
• although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

An ex-spouse you pay maintenance or child support to is not your dependant.

If you had a new spouse, or you separated from your spouse, during the year:

• you may be liable for MLS for the number of days you were single - if your income for MLS purposes was more than the single surcharge threshold of $97,000
• you may be liable for MLS for the number of days you had a spouse or dependent children - if your own income for MLS purposes was more than the family surcharge threshold of $194,000 (plus $1500 for each dependent child after the first one).

Your child is only your dependant if they are:

• under 21 years old
• 21 to 24 years old and studying full-time at school, college or university.

Your child is still your dependant if you are paying child support even if they don't live with you.

Your child includes:

• your child, whether born in marriage or not
• your adopted child
• a newborn or newly adopted child
• a child of your spouse (your stepchild)
• someone who is your child within the meaning of the Family Law Act 1975 (for example, a child who is considered to be a child of a person under a state or territory court order giving effect to a surrogacy agreement).

A foster child is not included as a dependant for MLS purposes.

If you need to pay the MLS, it will be added to your tax liability and may lead to a reduced refund or tax bill.

There is a special definition of income for working out the MLS.

As well as your taxable income (such as income from your job, business or investments), other items are included such as reportable fringe benefits, reportable super contributions, and net investment losses (such as losses from negatively geared investment properties).

In order to avoid the surcharge, you must have the appropriate level of private health cover. For singles, that means a policy with an excess of $750 or less. For couples or families, it means an excess of $1500 or less.

Cover for 'extras', such as optical, dental, physiotherapy or chiropractic treatment, is not private patient hospital cover.  Buying cover for those items only will not exempt you from the surcharge.

Note that for the purposes of MLS, travel insurance is not private patient hospital cover. Similarly, private patient hospital cover does not include cover provided by an overseas health fund.

Tax tips

• Beware health funds that try to sell you health cover plus extras to avoid the surcharge. The extras might be worth having from a health perspective but they won't impact on the surcharge.
• Don't be fooled by marketing material from private health providers advising you take out health cover before June 30 to avoid the surcharge. The way the rules work, if your income exceeds the threshold and you don't have appropriate private cover for the whole year, you'll pay the Medicare levy surcharge up to the date you took out the policy. So, if you get near the end of the financial year and you don't have health cover, it's already too late to totally avoid the surcharge this year. You will get a tax saving through avoiding the surcharge but only for the days between taking out the cover and the end of the financial year (which could be minimal if you leave it until the end of the year). You will, of course, get a full tax benefit in the next financial year. If you don't have cover yet, take it out as soon as possible in the tax year.
• If you get married during the year, the family thresholds apply from the date you get married to the date you take out the appropriate health cover.

Get stories like this in our newsletters.