The Medicare levy is added to a taxpayer’s tax liability (i.e., it adds to tax paid on their taxable income) and is paid upon lodgement of a tax return.
As a broad proposition, the Australian public health system (known as Medicare) provides Australian residents access to free or subsidized treatment by health professionals (e.g., doctors), free treatment and accommodation for public patients in public hospitals, and subsidized fees for certain services and procedures received by private patients in both public and private hospitals.
To help fund some of the costs of Medicare, a 2% levy (known as the Medicare levy) is imposed on the taxable income of taxpayers. The Medicare levy is added to a taxpayer’s tax liability (i.e., it adds to tax paid on their taxable income) and is paid upon lodgement of a tax return.
Although most individual taxpayers pay the Medicare levy, some can be exempt where they are either:
- a low-income earner (whose taxable income does not exceed a prescribed threshold); or
- a prescribed person during the whole of the year of income.
Generally, a low-income earner is exempt from the Medicare levy provided their taxable income does not exceed the Medicare levy exemption threshold (i.e., $22,398 for a single person in the 2019 income year). For a taxpayer whose taxable income exceeds this amount, they may, instead, be entitled to a reduction of the Medicare levy provided their taxable income is not more than the Medicare levy reduction threshold (i.e., $27,997 for the 2019 income year). Refer to S.3 and S.7 of the Medicare Levy Act 1986 (‘Medicare Levy Act’).
These thresholds are modified for taxpayers entitled to the seniors and pensioners tax offset, as well as for certain taxpayers with families. Refer to S.3 and S.8 of the Medicare Levy Act.
A Medicare levy exemption is also available for a taxpayer who is a prescribed person during the whole of the year of income. The term ‘prescribed person’ is defined in S.251U(1) of the Income Tax Assessment Act 1936 (‘ITAA 1936’) to include a non-resident, as well as any other person described in the section (subject to the TAX WARNING below).
A taxpayer with dependants A taxpayer with dependants is not a prescribed person (even if they satisfy the requirements of S.251U(1)) unless each of their dependants is also a prescribed person as described in the section. It should be noted that this rule may be modified for certain categories of prescribed persons (e.g., Defence Force members, but not non-residents). Refer to S.251U(2) and (3) of the ITAA 1936.
In addition to the Medicare levy, taxpayers whose income exceeds a certain amount may be required to pay the Medicare levy surcharge if they are without an appropriate level of private patient hospital cover. The surcharge aims to encourage individuals to take out private hospital cover and use the private hospital system to reduce the demand on the public Medicare system.
The application of the Medicare levy provisions may appear relatively straightforward at first instance as, in broad terms, they simply apply a 2% levy on a taxpayer’s taxable income. However, as we will see, these rules may sometimes result in inequitable outcomes.
An example of this is where a taxpayer is subject to the Medicare levy on a lump sum receipt of underpaid wages in arrears, which would have been exempt from the levy had the wages been paid on time (as the taxpayer was a low-income earner exempt from the Medicare levy in prior years). This particular scenario was examined by the Administrative Appeals Tribunal (‘AAT’) in Biswas v FCT [2019] AATA 2372 (‘Biswas’s case’) and is the subject topic of the notes.
All legislative references in this segment of the notes are to the ITAA 1936 unless otherwise stated.