Income testing the private health insurance rebate

This topic might seem a little leftfield for a tax column, but I will explain.

The legislation to apply an income test to the 30% private health insurance rebate has passed the House of Representatives and is expected to pass the Senate when it resumes on February 27, 2012. The income test will start from July 1, 2012.

Obviously not all SME owners will be affected, but for those that are, they need to understand that their taxable income, any fringe benefits and superannuation come into the calculation of the income test. I will explain this below.

The legislation gives effect to 2009 Federal Budget announcements concerning the private health insurance rebate and consequential Medicare Levy Surcharge changes. The essence of the proposed changes is to effectively income test the 30% private health insurance rebate for individuals whose income for Medicare levy surcharge purposes is more than $83,000pa and for families where that income is more than $166,000pa.

To achieve the means testing, the legislation proposes to introduce three new “Private health incentive tiers” with effect from July 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 July 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 effect of these new tiers would be that the rebate would begin to phase out for individuals who earn more than $83,000pa and for families where that income is more than $166,000pa. There would be no rebate where individual income is over $129,000pa and families over $258,000pa.

For single people aged 65 to 69 years, the rebate is 35% if they earn less than $83,000pa, and for those aged 70 and over earning that income, the rebate is 40%.

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.

For those who think they may be affected by the changes, the income test includes the sum of a person’s:

taxable income (including the net amount on which family trust distribution tax has been paid, lump sums in arrears payments that form part of taxable income, and payments for unused annual and long service leave); plus
reportable fringe benefits (as reported on the person’s payment summary); plus
total net investment losses (includes both net financial investment losses (eg. shares) 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 lump sum superannuation benefit, other than a death benefit, which they received that does not exceed their low rate cap.

The rebate can currently be claimed in one of three ways:

The health fund can provide the rebate as a premium reduction.
Where the full, upfront cost of the private health cover premiums has been paid, people can receive a cash payment from the Government through their local Medicare office or by lodging the claim form by post.
The rebate can be claimed on annual income tax returns if the full, upfront cost has been paid.

The changes are significant in a “hip pocket” sense and because of the way in which the income test is calculated, people may need to consult their accountant to see how they may be impacted.

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