Australian Tax Impacts of Medicare

19/02/2016

Having grown-up with the NHS, one of the issues that many UK expats struggle to get to grips with is how the Australian healthcare system impacts on their tax liability.

The Australian Federal Government healthcare system is known as Medicare.  Medicare provides a contribution towards basic medical expenses of eligible Australian resident individuals.  All Australian tax-residents (unless their income is below the threshold) are subject to the Medicare Levy (ML), which is currently charged at 2% on their Australian taxable income.  For individuals with taxable income over a certain threshold, an additional level of charge, the Medicare Levy Surcharge (MLS) can apply.

Most people understand that having private health insurance can reduce their tax liability but they are often confused about how this works in practice.

MLS is charged at an additional 1%/1.25% or 1.5% of taxable income where the taxpayer’s taxable income (or that of their family) exceeds the annual threshold and they don’t have an appropriate level of private health insurance hospital cover for all family members throughout the income year (which runs from 1 July to following 30 June).  Whilst, for taxpayers who are employees, the bulk of their ML should be collected via deduction at source through PAYG (Australia’s equivalent of PAYE in the UK) the same is not so for MLS.  So failing to ensure that you have the right level of private hospital insurance throughout the year can result in significant tax liability at the year end.  This can come as a nasty surprise for some expats!

Common problems are:

  • The policy is not arranged until after arrival in Australia so the exemption from MLS is only available for part of the year
  • The policy has too high an excess to be a qualifying policy for MLS exemption
  • The policy does not provide hospital cover within the MLS definition

If you are planning to emigrate from the UK to Australia, or even simply to relocate for a few years before returning to the UK, we strongly recommend you seek some advice well in advance of your move to ensure that you avoid the MLS trap and other potential tax pitfalls.

If you would like a free quote for some emigration tax advice contact Joanne Lamberth at joanne@tax.uk.com.

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