Income testing the Private Health Insurance rebate

Legislation was recently introduced in Federal Parliament to income test the 30% private health insurance rebate in effect from 1 January 1, 2012. This will be the Government’s third attempt to introduce these amendments.

The bills were originally introduced in May 2009, but were defeated in the Senate. They were re-introduced in November 2009 but were again defeated in the Senate in March 2010.

The legislation will not be debated until after Parliament resumes on August 16, 2011.

While many people may not be subject to the proposed new rules, it is important to know how they propose to operate, and that the income thresholds have to be calculated carefully. The thresholds include taxable income, reportable fringe benefits and superannuation contributions, so people may need to look at their tax returns or consult their accountant or adviser.

To achieve the means testing, the legislation proposes to introduce three new “Private health incentive tiers” (see below) in effect from January 1, 2012. If the legislation is passed, then from that date, individuals and families may not be eligible for the full 30% rebate for their private health insurance premiums.

In conjunction with this, also from January 1, 2012, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover may increase depending on their level of income.

The Bills propose to reduce the amount of private health insurance rebate an eligible person with a complying private health insurance policy is entitled to when that person has income for surcharge purposes above the relevant Medicare levy surcharge threshold. For the purpose of calculating a person’s income threshold, it is based on the definition of income used to calculate the Medicare levy surcharge for individuals or families – and this income definition has a taxation connection as I explain below.

The three new “Private Health Insurance Incentive Tiers” I mentioned above are:

Tier 1: singles whose income for surcharge purposes (see below) is from $80,001 pa to $93,000 pa inclusive and couples/families whose income for surcharge purposes is from $160,001 pa to $186,000 pa inclusive in the 2011-12 financial year, who hold a complying private health insurance policy, will have their private health insurance rebate reduced by 10 percentage points (from 30% to 20% where they are under 65 years of age) in relation to premiums and amounts in respect of premiums paid on and after January 1, 2012. The Medicare levy surcharge will remain at 1% for singles and couples/families who fall within tier 1 that do not hold appropriate private health insurance.
Tier 2: singles whose income for surcharge purposes is from $93,001 pa to $124,000 pa inclusive and couples/families whose income for surcharge purposes is from $186,001 pa to $248,000 pa inclusive in the 2011-12 financial year who hold a complying private health insurance policy, will have their private health insurance rebate reduced by 20 percentage points (from 30% to 10% where they are under 65 years of age) in relation to premiums and amounts in respect of premiums paid on and after January 1, 2012. From January 1, 2012, the Medicare levy surcharge will be increased by 0.25 percentage points to 1.25% for singles and couples/families who fall within tier 2 that do not hold appropriate private health insurance.
Tier 3: singles whose income for surcharge purposes is from $124,001 pa and over and couples/families whose income for surcharge purposes of $248,001 pa and over in the 2011-12 financial year who hold a complying private health insurance policy, will no longer receive any private health insurance rebate in relation to premiums and amounts in respect of premiums paid on and after January 1, 2012. From January 1, 2012, the Medicare levy surcharge will be increased by 0.5 percentage points to 1.5% for singles and couples/families who fall within Tier 3 that do not hold appropriate private health insurance.

For families with more than one dependent child, the relevant threshold is increased by $1,500 for each child after the first.

In future years, the singles thresholds will be indexed to average weekly ordinary time earnings and increased in $1,000 increments (rounding down). The couples/family thresholds will be double the relevant singles thresholds.

Income for surcharge purposes

Income for surcharge purposes is the sum of a person’s:

taxable income (including the net amount on which family trust distribution tax has been paid); plus
reportable fringe benefits (as reported on the person’s payment summary); plus
total net investment losses (includes both net financial investment losses and net rental property losses); plus
reportable super contributions (includes reportable employer super contributions (eg. under salary sacrifice arrangements) and deductible personal super contributions),

Less:

where the person is aged 55-59 years old, any taxed element of a super lump sum, other than a death benefit, which they received that does not exceed their low rate cap.

Existing private health insurance rebate arrangements will remain unchanged for singles with income for surcharge purposes of less than $80,001 pa and couples/families with a combined income for surcharge purposes of less than $160,001 pa in the 2011-12 financial year and who hold a complying health insurance policy. Singles and couples/families with a combined income for surcharge purposes below these thresholds will continue not to be liable for the Medicare levy surcharge if they do not hold complying health insurance.

As I mentioned above, these changes are yet to be debated by Parliament, but if they become law, the calculation of the income thresholds will become crucial.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .