Medicare Levy - Defence Force termination payment

Is an eligible termination payment (ETP) received by the taxpayer upon ceasing employment with the Defence Force included in their taxable income for the purpose of calculating the Medicare Levy imposed under section 5 of the Medicare Levy Act 1986 (MLA 1986) where the taxpayer is under 55 years of age?

Yes. An ETP received by the taxpayer upon ceasing employment with the Defence Force included in their taxable income for the purpose of calculating the Medicare Levy imposed under section 5 of the MLA 1986 as the taxpayer is under 55 years of age.

The taxpayer is under 55 years of age.

The taxpayer was a member of the Defence Force who was entitled to free medical treatment.

The taxpayer ceased to be a member of the Defence Force during the current income year. The taxpayer subsequently received an ETP from the Defence Force.

Section 5 of the MLA 1986 imposes a medicare levy which is payable in accordance with Part VIIB of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 251S(1) of the ITAA 1936 provides that the medicare levy is payable upon the taxable income of a resident taxpayer. However subsection 251T(1) of the ITAA 1936 provides that the medicare levy is not payable by a 'prescribed person'.

Paragraph 251U(1)(a) of the ITAA 1936 provides that a member of the Defence Force who is entitled to free medical treatment is a 'prescribed person'.

Section 9 of the MLA 1986 provides that where a person is a prescribed person for only part of the year, the amount of Medicare Levy payable is reduced in proportion to the number of days in the year that they were a 'prescribed person'.

The taxpayer ceased to be a member of the Defence Force during the year. They were a 'prescribed person' for the period that they were a member of the Defence Force but are not a 'prescribed person' after that time. The amount of the medicare levy to which they are liable will be reduced in proportion to the time they were a 'prescribed person'.

In calculating the taxable income to which the Medicare levy will apply subsection 251S(1A) of the ITAA 1936 provides that the Medicare levy is not payable on that portion of any ETP included in assessable income in respect of which a rebate under section 159SA of the ITAA 1936 will effectively reduce the primary rate of tax to 0%.

Section 159SA of the ITAA 1936 allows a rebate to ensure that any post-June 1983 taxed element of an ETP received by a taxpayer at the age of 55 and over is taxed at 0% up to a certain threshold applicable for a particular income year.

The taxpayer is under 55 years of age and therefore the rebate will not apply. Accordingly, the medicare levy will be payable on the ETP received by the taxpayer. The amount of the medicare levy will however be reduced in proportion to the period that the taxpayer was a member of the Defence Force.