Can salary packaging be used to get out of the Medicare Levy Surcharge?

Can I use salary packaging to avoid the Medicare Levy Surcharge?

In early June, my beloved and I received letters from the Australian Government outlining that as we were now 31 we would be subject to the Medicare Levy Surcharge (MLS) and Lifetime Health Cover (LHC) from 1 July this year. This notification has two potential implications for us.

 

Firstly, if our combined MLS assessable income exceeds $180,000 from now on, we will be required to pay between 1-1.5% of our income for the Medicare Levy Surcharge, in addition to the Medicare Levy itself.

 

Secondly, as the Lifetime Health Cover now applies, for every year of our lifespan from now on that we don’t have private health insurance, we will need to pay a fee of 2% per year until such time as we take up private health insurance (if we ever do). For example, if we get private health insurance in 10 years time, we will need to pay the standard insurance costs + 20% LHC penalty each and every year we have private health insurance from then onward. Alternatively, if we took out private health insurance before turning 31 and maintained it indefinitely, we would only ever need to pay the insurance fees.

 

What is the point of the MLS and LHC and when are they applicable?

In lay mans terms, the point of these surcharges is to try and force people into buying private hospital insurance cover. In 2017-18, $75.277 Billion, or 16.2% of total Federal expenditure, was allocated to the health system in Australia. Consequently, the MLS and LHC are Government policies implemented in an attempt to reduce the number of people dependent upon our public funded hospitals in order to reduce the financial burden of the system on the public.

 

The MLS and LHC only become applicable once a person turns 31, and are of course only applicable if a person does not have appropriate private hospital cover.

 

The MLS is income tested and only applies to individuals earning over $90,000, or couples earning over $180,000 a year. Additionally, the surcharge percentage applicable is determined on a tiered income basis. The below table illustrates the applicability of the MLS for all incomes.

 

Table 1: MLS applicability

MLS N/A Tier 1 income Tier 2 income Tier 3 income
Single income

< $90,000

$90,001 – $105,000

$105,001 –$140,000

> $140,001

Family income

< $180,000

$180,001 – $210,000

$210,001 – $280,000

> $280,001

MLS percentage

0%

1%

1.25%

1.5%

 

Can salary packaging be used to get out of the MLS?

As a typical Australian, I don’t like being told by my Government that I need to start pulling my weight, when I’m already paying an average 34% income tax, plus 10% GST on goods and services. So, I thought to myself “Sure, I’ll pay an extra $100 a month for private health insurance”. Just kidding, I actually thought “Fuck that. How can we get out of this?”. So, I started researching ways we could get out of paying the MLS.

 

The first thought that came to my head was salary packaging. As recently outlined in my post about salary packaging, salary packaging is an arrangement between an employee and employer whereby certain items are paid for out of an employees pre-tax salary. Typical items include superannuation, cars, computers, electricity, etc.

 

For those of us who are lucky enough to have the option to salary package certain items, the idea that salary packaging can be used to reduce our taxable incomes to avoid the MLS is indeed tempting. But, is this an effective option to reduce your taxable income?

 

The short answer is, it’s complicated. It all depends on the item(s) you’re packaging.

 

For the purposes of determining your taxable income for MLS purposes, salary packaged superannuation contributions are not a valid option as this is counted as a form of reportable super contribution. In determination of whether the MLS applies, the Australian Taxation Office counts reportable super contributions as part of your MLS assessable income. So, salary sacrificing super isn’t going to get you anywhere for MLS avoidance purposes.

 

Other salary packaging items are a bit more complex in nature. Items that are considered to be Fringe Benefits are also not acceptable options to salary package. However, items that are not considered to be Fringe Benefits do appear to reduce MLS assessable income, and therefore potentially enable avoidance of the MLS if your income is on the borderline (i.e. $90K for singles or $180K for couples).

 

For me, my options in this regard are pretty much limited to laptop computers, so salary sacrificing isn’t the answer to my MLS requirements. However, this could be different for you, so make sure you check out your salary packaging options and either do a lot of research, or speak to your accountant about your packaging options and if these could help you avoid the MLS.

 

And, what about the LHC?

Unfortunately, when it comes to the LHC, the only way I’ve found to avoid it is to follow direction and obtain private health insurance.

 

However, if you’re diligent enough, it may pay to set up a special health account and allocate funds into it for future needs, should they be required. Before going down this route though, do your research into insurance premiums… And as per every financial decision, consider your particular circumstances, and speak to a financial advisor if necessary.

 

Conclusion

As the saying goes, there’s only 3 things certain in life: birth, death and taxes. This is pretty true. However, there are ways to reduce our taxes where possible.

 

For the purposes of the MLS, there may in fact be options available to reduce your MLS assessable income in order to avoid having to pay the extra 1-1.5% of your income in tax.

 

Unfortunately, the LHC is pretty much unavoidable if you choose not to get private hospital cover. But, if you’re diligent, you may be able to plan well enough for your future to easily deal with the LHC should you ever need to buy private health insurance.

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The Flawed Consumer is a Gen Y consumer that is on a mission to achieve wealth simply by changing spending and lifestyle habits.

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