Pitfalls abound, and if you’ve planned for a large HECS bill another aspect to keep in mind is the Medicare Levy Surcharge (MLS). Mr Howard’s carrot of a 30% subsidy on private health insurance wasn’t enough, so the stick of the MLS was introduced to force high income earners (and aggressive salary packagers of their intern wages) to purchase private health insurance.
Income for MLS Purposes
To make sure the stick struck home, Mr Howard made sure that Income for MLS Purposes has a similar broad remit to HECS Repayment Income, including
- taxable income (including the net amount on which family trust distribution tax has been paid)
- reportable fringe benefits – again grossed up like with HECS Repayment Income 🙁
- total net investment losses
- reportable super contributions
- if you have a spouse, their share of the net income of a trust on which the trustee must pay tax (under section 98 of the Income Tax Assessment Act 1936) and which has not been included in their taxable income.
- exempt foreign employment income (if you or your spouse had a taxable income of $1 or more and received such income).
How much of a surcharge?
The threshold is $90000 for singles and $180000 for couples. Simple solution – get a partner! Especially if they’re not salary packaging, this can give you quite a bit of freedom.
Once over the threshold, the rates are levied on a tiered basis from 1% to 1.5% on your total Income for MLS Purposes
How to manage your exposure?
Lots of options. First is to partner up. Second is to buy private health insurance, say if you’re looking at having a baby or other significant medical events. Third is to buy junk private health insurance, that might be pretty useless but will allow you to save on your tax.
An example of option 3 is a single guy who through salary packaging and extra superannuation has a MLS income of $100000. MLS is 1%, or $1000. I just got a quote for junk insurance (NIB even has a little box that says “I want to save on tax”) – $822 for the year. So a $200 saving and you might even get some use out of it.
Keep in mind that if you purchase health insurance part-way through a year, you pay the MLS on a pro-rata basis for the year, based on how many days out of 365 you had insurance. So buying on June 30th won’t really help for a year that’s already passed.