Don’t get caught by income thresholds for health insurance rebate

The income thresholds for the private health insurance rebate (offset) and the Medicare levy surcharge will be frozen with effect for three years from July 1, 2015 if a bill introduced in Federal Parliament is passed.

The Private Health Insurance Amendment Bill (No 1) 2014 was introduced in the House of Representatives on September 24, 2014. It proposes to implement a 2014 federal budget announcement to pause (i.e. freeze) for three years, with effect from July 1, 2015, the income thresholds which determine the tiers for the Medicare levy surcharge and the Australian Government Rebate on private health insurance at 2014-15 rates. The bill would amend the Private Health Insurance Act 2007 (PHI Act) to set income thresholds for the income tiers at the 2014-15 rates in the financial years 2015-16, 2016-17 and 2017-18.

The income thresholds for the surcharge are set out in the Medicare Levy Act 1986 and the A New Tax System (Medicare Levy Surcharge – Fringe Benefits) Act 1999 and these acts refer to the thresholds set out in the PHI Act. Therefore, no direct amendments to the tax law are required in order to pause the surcharge income thresholds as the amendments to the PHI Act will pause the income thresholds for the surcharge and the rebate.

The 2014-15 thresholds that will apply for three years commencing on July 1, 2015 are:

The private health insurance offset percentages that have applied since April 1, 2014 are as follows:

• Base (see above):
• Under 65 years old – 29.04%;
• 65 – 69 years – 33.88%;
• 70 years or over – 38.72%.
• Tier 1 (see above):
• Under 65 years old – 19.36%;
• 65 – 69 years – 24.20%;
• 70 years or over – 29.04%.
• Tier 2 (see above):
• Under 65 years old – 9.68%;
• 65 – 69 years – 14.52%;
• 70 years or over – 19.36%.
• Tier 3 (see above) – 0%.

The original 30%, 35% and 40% offset percentages were altered following the Rebate Adjustment Factor (RAF) by the Private Health Insurance Legislation Amendment Act 2014. That factor represents the difference between the CPI and the industry weighted average increase in premiums. That amending act had the aim of reducing the regulatory burden relating to the government rebate on private health insurance i.e. reducing what it costs the government to provide the private health insurance rebate.

Pausing the income thresholds at 2014-15 levels is expected to result in individuals with incomes marginally below each threshold whose income increases moving into a higher income tier sooner. As a result, the government says some individuals who hold private health insurance may receive a lower rebate (offset) than if the income thresholds were indexed as usual. Some individuals who do not have private health insurance, and who would not otherwise be liable to pay the Medicare levy surcharge, may become liable to pay the surcharge, and some individual’s level of surcharge may increase.

The changes, if they become law, will not apply until July 1, 2015, so there is still some time to work through what they will mean for individual circumstances.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.