Medicare levy surcharge: policy has a nil excess but requires a co-payment in respect of claims made under the policy.

Is the taxpayer liable to pay the Medicare levy surcharge under section 8D of the Medicare Levy Act 1986 (MLA 1986) where their private patient hospital cover policy requires a co-payment in the event they make a claim under the policy?

No. The taxpayer will not be required to pay the Medicare levy surcharge under section 8D of the MLA 1986 as the taxpayer has the appropriate level of private patient hospital cover.

The taxpayer and their spouse have a private health insurance policy, with a

registered health fund provider, which meets the requirements of section 5A of the National Health Act 1953 (NHA 1953).

The hospital cover provides for private patient public and private hospital cover.

The policy does not require an 'excess' payment to be made by the taxpayer.

The policy features a co-payment method. Under this co-payment method the health fund provider will pay 75% of the overall charge of hospital treatment and the member contributes towards the balance (ie 25%). The co-payment amount is capped at $2000 per member/$4000 per family per year.

The combined taxable income of the taxpayer and their spouse exceeds $100,000 in the year of income.

The taxpayer and their spouse do not have any dependent children.

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

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.

Section 3A of the MLA 1986 indicates that the family surcharge threshold for a family with one or less dependant children is $100 000.

Subsection 3(5) of the MLA 1986 states 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 NHA 1953.

However, subsection 3(5A) of the MLA 1986 provides that a taxpayer will not have the appropriate level of private patient hospital cover for the purposes of subsection 3(5) of the MLA 1986 if the excess payable in respect of a family policy exceeds $1000 for the whole family for the income year.

The Revised Explanatory Memorandum to the Taxation Laws Amendment Act (No. 6) 2000 clearly distinguishes between a co-payment and an excess (front-end deductible). It states that: 'A co-payment, which is an out of pocket expense dependent on the cost of hospital treatment, is not a front-end deductible. A co-payment arises due to the difference between the amount the health fund is prepared to pay, as specified in the applicable benefits arrangement and the cost of treatment determined by the hospital.'

The taxpayer is married, has a family taxable income exceeding the family surcharge threshold for the relevant year of income and is not a prescribed person.

However, as discussed above, a co-payment is not an excess. The taxpayer's policy does not require an excess payment. The requirement to make co-payments in respect of claims made under the policy will not trigger the operation of subsection 3(5A) of the MLA 1986. Therefore, the taxpayer is covered by an insurance policy that provides private patient hospital cover for the purposes of subsection 3(5) of the MLA 1986.

Consequently, the taxpayer is not liable for the Medicare levy surcharge under section 8D of the MLA 1986 as all of the conditions of that section have not been met.