Medicare Levy Surcharge - policy requires $1000 excess per person

Is the taxpayer liable to pay the Medicare levy surcharge under section 8D of the Medicare Levy Act 1986 (MLA 1986) where they changed their private patient hospital cover policy to a family hospital cover policy requiring a $1000 excess for each person covered under the policy?

Yes. The taxpayer will be required to pay the Medicare levy surcharge under section 8D of the MLA 1986 from the date they changed their policy to the end of the income year.

The taxpayer and their spouse have had 'couples' hospital insurance cover for a number of years. Prior to 24 May 2000, the taxpayer made an election under subparagraph 3(5)(a)(i) of the MLA 1986.

The taxpayer and spouse changed their cover to 'family' hospital insurance cover, which requires a $1000 excess for each person covered by the policy partway through the income year.

The combined taxable income of the taxpayer and spouse exceeds $100 000 in the year of income. Neither spouse received reportable fringe benefits.

The taxpayer has one dependant child.

Neither spouse is a prescribed person as defined in section 251U of the Income Tax Assessment Act 1936 (ITAA 1936).

Paragraph 251S(1)(a) of the ITAA 1936 provides that a Medicare levy is levied at the rate applicable in the MLA 1986 from the 1984 year of income onwards on the taxable income of a person who at any time during the year was a resident.

Section 8D of the MLA 1986 provides the amount of Medicare levy payable by a taxpayer is increased by 1% of their taxable income and reportable fringe benefits where, for the whole period: • they are a married person • the family income (total taxable income and reportable fringe benefits) exceeds the family surcharge threshold • they, or at least one of their dependants, are not covered by an insurance policy that provides private patient hospital cover, and • they are not a prescribed person as defined in section 251U of the ITAA 1936.

This increase in the amount of Medicare levy payable is commonly known as the Medicare levy surcharge.

Section 3A of the MLA 1986 provides that the family surcharge threshold for a family with one or less dependant children is $100 000. The threshold is increased by $1500 for each child, excepting the first child.

Subsection 3(5) of the MLA 1986 provides that a person is covered by an insurance policy that provides private patient hospital cover if the policy is an applicable benefits arrangement within the meaning of section 5A of the National Health Act 1953. Subsection 3(5A) of the MLA 1986 imposes the additional requirement that the family policy excess amounts be capped at $1000 for the whole family for the year.

However, subsection 3(5B) of the MLA 1986 provides that if the person has been covered by the same policy continuously since the end of 24 May 2000 and that cover is not modified after that date, that person is considered to have the appropriate private patient hospital cover while that policy remains in place if the taxpayer made an election under subparagraph 3(5)(a)(i) of the MLA 1986 prior to 24 May 2000 notwithstanding the requirements of subsection 3(5A) of the MLA 1986.

The taxpayer was covered by the same policy continuously since the end of 24 May 2000 and made the appropriate election. The taxpayer is therefore considered to be appropriately covered while the 'couples' policy remained in place.

The taxpayer changed their policy to a family policy which provided private patient hospital cover as required by subsection 3(5) of the MLA 1986. The policy has an excess of $1000 per person. The excess for this family policy exceeds the maximum allowable excess amount permitted by subsection 3(5A) of the MLA 1986. Therefore, the taxpayer is not considered to be covered by an insurance policy that provides private patient hospital cover for the purposes of the MLA 1986.

Subsection 8D(4) of the MLA 1986 allows for partial year calculations of the surcharge for married persons. Accordingly, the taxpayer is liable to pay the surcharge from the date they changed policies to the end of the financial year. Note: the Medicare levy surcharge on a taxpayer's taxable income applies from the 1998 income year onwards and on reportable fringe benefits from the 2000 and later years of income.