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Depending on their income, clients with private health insurance may be eligible for a private health insurance rebate to help cover the cost of insurance premiums.
In most cases, the private health insurance rebate is claimed as a premium reduction through the private health insurer. However as it’s income tested, if the private health insurer does not have current income details it can result in the insurer reducing premiums by an amount that is greater than the client is entitled to. In this case, clients may receive an unexpected tax liability when they lodge their tax return.
Background
A single person with income for surcharge purposes over $90,000 a year, or a couple with combined income over $180,000 a year, need to have an appropriate level of private health insurance so that the Medicare Levy surcharge will not be levied. The Government provides tiered levels of private health insurance rebate to help cover the cost of the insurance premiums.
The private health insurance rebate is income tested (see table below). A client nominating a higher tier of rebate than they are entitled to can result in a tax liability upon lodging their income tax return, and this can very often lead to a cash flow problem.
Income tested private health insurance rebate
The private health insurance rebate is income tested. Subject to a single person or a family’s income for surcharge purposes, four different levels of rebate (applicable from 1 April 2019 to 31 March 2021*) are available as follows:
Singles income
Families income
$90,000 or less
$180,000 or less
$90,001 - $105,000
$180,001 to $210,000
$105,001 - $140,000
$210,000 - $280,000
$140,001 or more
$280,001 or more
Rebate
Age of the oldest person
< age 65
Age 65 - 69
Age 70+
Base Tier
25.059%
29.236%
33.413%
Tier 1
16.706%
20.883%
25.059%
Tier 2
8.352%
12.529%
16.706%
Tier 3
0%
0%
0%
Single parents and couples (including de facto couples) are subject to family tiers. For families with more than one dependent child, the income thresholds are increased by $1,500 for each child after the first.
* The rebate percentages are adjusted annually on 1 April by a rebate adjustment factor which is calculated by the Department of Health (however, no adjustment applied on 1 April 2020). The income thresholds will remain the same until 1 July 2021.
Income for surcharge purposes
Income for surcharge purposes is used to test an individual or a family’s eligibility for the private health insurance rebate. To be eligible for any rebate, income for surcharge purposes must be less than the relevant Tier 3 income threshold illustrated in the above table.
Income for surcharge purposes includes:
- Taxable income less any assessable First Home Super Saver released amount and any taxed element of a super lump sum that does not exceed the low rate cap ($215,000 for 2020/2021 income year)
- Reportable fringe benefits
- Reportable super contributions
- Total net investment losses
- The amount on which family trust distribution tax has been paid
Claiming the private health insurance rebate
There are two options to claim the rebate:
- as a premium reduction through the private health insurer. This means that less upfront insurance premium is payable to the insurer; or
- as a refundable tax offset when lodging the individual tax return. This means that the full upfront insurance premium without any reduction is payable to the insurer.
Claiming as a premium reduction
It is common for an individual or a family to choose to receive the private health insurance rebate through the insurer by nominating the income tier they expect to fall into.
Where a lower tier than the actual income for surcharge purposes is nominated, the individual will receive a refundable tax offset at tax time, which represents the overpaid upfront insurance premiums. This offset can be used to reduce other tax liabilities and Medicare Levy and is refundable if in excess.
Where a higher tier of rebate is applied by the insurer (eg lowest level of upfront premium is paid to insurer) than the eligible tier based on income for surcharge purposes, a private health insurance liability will be created upon the client lodging their income tax return. This tax liability represents the over-claimed private health insurance rebate during the income year and needs to be paid back through the tax return lodgement process. This can happen where:
- an insurer automatically applies the “Base Tier” rebate (ie highest rebate) where an individual does not nominate a tier;
- underestimated income is used when applying for private health insurance;
- income increases over time however the insurer is not updated. As a result, a higher level of rebate continues.
Example
Jenna and Mike are a couple with one dependent child. Mike earns $115,000 a year. Jenna worked 2 days a week in the past nine years earning $60,000 a year up until 30 June 2020. The insurer has been applying the Base Tier rebate to provide a 25.09% reduction in their upfront private health insurance premium.
From 1 July 2020, Jenna increased her working hours to full time and started to earn $100,000 from 1 July 2020. Based on the new family income level, the Tier 2 rebate (ie 8.352%) is applicable, however, the insurer continued to apply the Base Tier rebate (ie 25.059%) as the couple did not provide the increased income level to the insurer.
The full insurance premium costs $10,000 a year and the couple paid $7,494 in the 2020/2021 financial year due to the Base Tier rebate provided by the insurer. When tax returns are lodged for the 2020/2021 financial year, the ATO determines that the family’s income for surcharge purposes results in an 8.352% tax offset. As a result, the over-claimed rebate amount of $1,671 (ie $10,000 x (25.059% - 8.352%)) becomes a private health insurance liability.
Jenna and Mike were not aware of this and were expecting a small amount of tax refund. However, due to the $1,671 private health insurance liability, the couple need to pay the outstanding tax amount rather than receiving a refund. If their tax returns are not lodged within the required timeframe, the ATO can impose a failure to lodge on time penalty. In comparison, where a tax return lodgement results in a refund, the ATO will generally not impose this penalty even if an income tax return is lodged outside the required timeframe.
FirstTech comment
The application of a higher tier of rebate than a client’s actual income level can result in a tax liability through the individual’s tax return for that financial year, which can result in a cash flow problem.
It is important for individuals to provide the right level of income to the insurer so that the correct tier of rebate can be applied to the insurance premium, to avoid having an unexpected tax liability resulting from the over-claimed insurance rebate at the tax time.
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Disclaimer
The information contained in this update is based on the understanding Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) has of the relevant Australian laws as at the article date. As these laws are subject to change you should refer to our website at www.cfs.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including AIL, nor CFSIL, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
AIL and CFSIL are also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.