Medicare Levy Surcharge - unused annual and long service leave

Are payments received by a taxpayer, upon retirement, for unused annual leave and unused long service leave included in their taxable income for the purposes of calculating the Medicare levy surcharge under section 8D of the Medicare Levy Act 1986 (MLA 1986)?

Yes. Payments received by a taxpayer, upon retirement, for unused annual leave and unused long service leave are included in their taxable income for the purposes of calculating the Medicare levy surcharge under section 8D of the MLA 1986.

The taxpayer retired during the 1999 or later income year.

The taxpayer received payments of unused annual and long service leave which were correctly included in their assessable income for that year.

The taxpayer and their spouse's taxable income and reportable fringe benefits exceeded the family surcharge threshold and the taxpayer's taxable income and reportable fringe benefits exceeded the relevant Medicare levy single low income exemption threshold.

The taxpayer was married for the whole of the income year.

The taxpayer did not have an insurance policy that provided for private hospital cover.

The taxpayer was not a prescribed person.

Section 8D of the MLA 1986 provides that a taxpayer will be subject to a Medicare levy surcharge of 1% where, for the whole of a year of income: • they are married (paragraph 8D(1)(a) of the MLA 1986); • they or at least one of their dependants (unless the dependant is a prescribed person) is not covered by an insurance policy that provides private patient hospital cover (paragraph 8D(1)(b) of the MLA 1986); and • they are not a prescribed person (paragraph 8D(1)(c) of the MLA 1986); and • the taxable income and reportable fringe benefits (if any) of the taxpayer and their spouse exceeded the family surcharge threshold (paragraph 8D(3)(b) of the MLA 1986; and • the taxpayer's taxable income and reportable fringe benefits (if any) exceeds the relevant Medicare levy single low income exemption threshold (paragraph 8D(3)(c) of the MLA 1986).

Taxable income equals 'assessable income' minus ' deductions' (section 4-15 of the Income Tax Assessment Act 1997 (ITAA 1997)).

'Assessable income' consists of ordinary income and statutory income (subsection 6-1(1) of the ITAA 1997).

Subsection 6-10(2) of the ITAA 1997 states that amounts which are not ordinary income, but are specifically included in the taxpayer's assessable income by provisions about assessable income, are called statutory income.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list are sections 26AC and 26AD of the Income Tax Assessment Act 1936 (ITAA 1936).

Those sections provide that certain lump sum payments for accrued unused annual leave (section 26AC of the ITAA 1936) and accrued unused long service leave (section 26AD of the ITAA 1936) are included in the taxpayer's assessable income.

The taxpayer's payments for accrued unused annual and long service leave are included in their assessable income. Those amounts are therefore are considered to be part of their 'taxable income' under section 8D of the MLA 1986 for the purposes of the Medicare levy surcharge.