$1,337 ATO penalty hitting thousands more Aussies: ‘Extra money to the tax man’

Thousands of Aussies are set to be stung by a little-known tax penalty when they lodge their tax returns. The Medicare Levy Surcharge is a penalty that applies if you earn over a certain amount and don’t have private health insurance.

More than half a million Aussies paid the Medicare Levy Surcharge in 2021-22, the latest Australian Taxation Office (ATO) statistics found. That’s up 21 per cent or 110,000 people from the previous year, and up 50 per cent over two years.

Tax Invest Accounting director and registered tax agent Belinda Raso told Yahoo Finance the surcharge was one reason Aussies could find themselves hit with a tax debt this year.

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The Medicare Levy Surcharge applies to singles who earn over $97,000 (up from $93,000 last financial year) and families who earn over $194,000 (up from $186,000) and don’t have an appropriate level of hospital cover.

If the surcharge applies to you, you will be charged 1, 1.25 or 1.5 per cent of your income when you lodge your tax return. This is separate to the Medicare levy, which is 2 per cent of your taxable income.

Someone earning the average $98,000 full-time income would pay a 1 per cent extra income tax or $980 due to the Medicare Levy Surcharge. Meanwhile, a family with two people earning the average full-time income would pay $1960 combined.

The average Medicare Levy Surcharge paid was $1,337 in 2021-22, the ATO found.

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Medicare Levy Surcharge thresholds

Here are the 2024-25 income thresholds:

To determine your income for the Medicare Levy Surcharge, the ATO takes into account your taxable income, along with things like your reportable fringe benefits and salary sacrifice arrangements.

“When you’ve got salary sacrifice that gets added back onto your taxable income and you [may have] gone over that amount and get hit with a levy surcharge,” Raso told Yahoo Finance.

“The same thing happens with reportable fringe benefits, which are a non-cash benefit your employer gives you.”

Aussies in the dark over tax charge

For many Aussies, this surcharge could come as a nasty surprise at tax time.

According to iSelect research shared with Yahoo Finance, around one in five Aussies don’t know if they are currently paying the Medicare Levy Surcharge.

Meanwhile, 44 per cent said they had either never heard of the surcharge or had no understanding of it.

iSelect comparison expert Sophie Ryan said now was a good time to think about whether you should take out an appropriate level of private hospital cover.

“Some higher income earners may be able to find private hospital cover for a similar price to the additional tax they would be required to pay via the Medicare Levy Surcharge if they don't have hospital cover,” Ryan told Yahoo Finance.

“Now’s the time to consider whether you’d prefer to give extra money to the tax man or put it towards a hospital policy so you’re at least getting something in return.”

According to CHOICE, basic hospital policies can be cheaper than paying the Medicare Levy Surcharge but they provide limited cover.

Basic policies offer the lowest tier of health cover at the lowest price and must cover treatment in a public hospital for palliative care, rehabilitation and psychiatric care.

For NSW and ACT residents, for example, CHOICE found the HBF Start Hospital Basic cover had an annual premium of $1,025 for those earning between $97,000 and $113,000. The more you earn, the more you can potentially save.

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