Bills Digest no. 121 2007–08
Tax Laws Amendment (Medicare Levy Surcharge Thresholds) Bill 2008
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Tax
Laws Amendment (Medicare Levy Surcharge Thresholds) Bill 2008
Date introduced: 27
May 2008
House: House
of Representatives
Portfolio: Treasury
Commencement: On
Royal Assent
Links: The relevant
links to the Bill, Explanatory Memorandum and second reading speech
can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills
have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.
The purpose of the Bill is to increase the Medicare
levy surcharge thresholds on annual taxable income from $50 000 to
$100 000 for individuals, and from $100 000 to $150 000
for families and couples. The Bill proposes amendments to the A New
Tax System (Medicare Levy Surcharge—Fringe Benefits) Act 1999 and
the Medicare Levy Act 1986 (MLA 1986).
When Medicare was introduced in 1984 the scheme was part-funded by the
imposition of a Medicare levy, originally set at 1 per cent of taxable
income, with a low income cut-off threshold below which no levy was payable.
In 1995 the Medicare levy was increased to its current level of 1.5 per
cent of taxable income.
The Medicare levy surcharge (MLS) is an additional one per cent surcharge
on taxable income imposed on ‘high-income’ earners who do not have private
hospital insurance, currently set at $50 000 for individuals and
$100 000 for couples and families. The MLS was introduced by the
former Howard government in 1996 as part of a package of reforms to address
declining private health insurance membership.[1] The Medicare levy thresholds, below which no Medicare levy is
payable, are regularly adjusted to take account of increases in the Consumer
Price Index (CPI). Changes to the current threshold amounts are proposed
in a separate bill, the Tax Laws Amendment (Medicare Levy and Medicare
Levy Surcharge) Bill 2008. However, the MLS threshold amounts have
remained unchanged since they were first applied in 1997. This Bill proposes
increases to the MLS thresholds from $50 000 to $100 000 for
individuals, and from $100 000 to $150 000 for families and
couples. There is no proposal to regularly adjust the thresholds in future
years to take account of CPI.
As well as amendments to the MLA 1986, the Bill proposes similar amendments
to reportable fringe benefits provisions in the A New Tax System (Medicare
Levy Surcharge—Fringe Benefits) Act 1999. This is to ensure that
individuals will not swap their cash salary for fringe benefits and avoid
or reduce their liability for the MLS. The amendments will apply to the
2008–09 year of income and subsequent years.
The Medicare levy and surcharge only partially fund the total cost of
Medicare. In 2006–07 the levy and surcharge raised around $7.2 billion
in revenue, while the cost of Medicare for the same period was $17.2 billion.[2]
This measure was officially announced in the 2008–09 Budget.[3]
The Bill passed the House of Representatives on the 29 May 2008. At the
time of writing it has not been referred to a committee.
The proposed changes to the MLS have generated considerable attention
and debate. The Assistant Treasurer, the Hon. Chris Bowen, maintains that
the proposed increases in the MLS thresholds ‘will help reduce financial
pressure on many working families’ and casts the measure as providing
consumers with ‘real choice’.[4]
However, opponents of the measures argue the proposed changes will lead
to declines in private health insurance membership, financial pressure
on private health insurance premiums and strain the public hospital sector.
Some have argued—notably the Federal Opposition Health spokesman, the
Hon. Joe Hockey, the Australian Health Insurance Association (AHIA) and
the Australian Medical Association (AMA)—that the proposed increases to
MLS will lead to a mass exodus of members from private health insurance
and place a greater strain on the public hospital sector, particularly
on public hospital waiting lists.[5]
They argue that holders of private health insurance will abandon their
private health insurance cover and instead rely on public hospitals to
meet their health needs, thus adding significant strain to the already
overstretched public sector.
In support of these arguments the AHIA and the AMA both point to separately
commissioned research which, they claim, casts doubt on Treasury advice
that 485 000 people would drop their private health insurance, and
result in a net saving to government of $299 million.[6] The AHIA claims that their research shows that
around 613 000 people would need to drop their insurance in order
to meet the forecast savings, meaning that some 900 000 Australians
would then become solely reliant on the public system.[7]
Separately, the AMA points to research it commissioned from Access Economics.
While not forecasting numbers who will drop their cover—on the basis that
knowledge of the price elasticity of demand for private health insurance
was insufficient—the research questions the forecast savings from the
measure, which is described as ‘highly implausible’.[8]
However, claims of a mass exodus from private health insurance and the
negative consequences for the public hospital system have been questioned
by others, including by some in the private sector.
The Australian Private Hospitals Association (APHA) is not convinced
that the changes will lead to an exodus of members. It argues that the
high quality and value that private health insurance offers ‘outweighs’
any small financial benefits to be gained from member dropping their private
cover, and still sees private health insurance membership ‘growing strongly’
in the next few years.[9]
Some in the private sector point to the importance of other factors driving
private health insurance membership, such as rising incomes and disillusionment
with the public hospital sector.[10]
In an indication that longer-term damage to private health insurance
is not envisaged by all in the sector, the proposed acquisition by health
insurer BUPA Australia of its competitor MBF remains on-track, despite
the announced changes to the MLS.
Others outside the private health sector have argued that other measures—notably
Lifetime Health Cover and the 30 per cent private health insurance rebate—play
a greater role in the decision to purchase private health insurance than
does the MLS. They point to the continuation in the decline in private
health insurance membership after the introduction of the MLS in 1997,
with this only being arrested when these other measures were introduced
in subsequent years.[11]
It is further argued by some proponents of the MLS changes that those
who purchase private health insurance in order to avoid the ‘penalty’
of the MLS tend to be young and healthy and purchase the cheapest product
available, often with high co-payments. These members tend to have low
rates of hospital use, and in any case rely on the public system in order
to avoid the high co-payments that they would be subject to if they used
their private health insurance. In any case the higher premiums faced
after the age of 31 also act as a disincentive for young people considering
abandoning their cover. Therefore, it is argued, their opting out of private
health insurance will have minimal impact on public hospital utilisation
rates, and pubic hospital waiting lists.[12]
Opponents of the changes also argue that the proposed changes will lead
to higher private health insurance premiums.[13] It is argued that as young healthy members
drop their private health insurance this will lead to pressure on health
insurance premiums, as health insurers seek to offset the impact of the
loss of this revenue stream. In particular, those health insurers that
target younger healthy members—that is, those who are likely to drop their
membership—are likely to face the greatest financial pressures. Health
insurer NIB (the only publicly listed health insurer), has specifically
targeted younger members, but has already seen the impact of the proposed
increases to the MLS thresholds, with its share price dropping significantly
following the announcement.[14]
This loss of younger members it is argued, may lead to a ‘snowballing
effect’ as higher insurance premiums turn people against private health
insurance which then leads to more premium rises to offset these losses,
creating premium inflation.[15]
While the impact of reforms to the private health insurance sector introduced
by the former Howard government in 2007 are yet to be fully gauged, these
were designed to improve the attractiveness of private health insurance
by enabling health insurers to offer more flexible and innovative products,
such as Broader Health Cover.[16] These reforms are intended to enable insurers to respond effectively
to the broader challenges they are likely to face in coming years, including
an ageing population, increases in chronic disease prevalence and expensive
new technologies. Some insurers have responded with new products, but
there has been criticism that in areas such as palliative care, there
is little product choice.[17]
It remains to be seen whether any loss of members due to changes to the
MLS, will prompt health insurers to offer a wider range of innovative
products in order to maintain their attractiveness to consumers.
Although a stated intent of the proposed increases to raise the MLS thresholds
is to bring them into line with those income thresholds that applied in
1997[18], there is no
proposal to regularly adjust the MLS thresholds in line with increases
in the CPI in future years, as is done with the Medicare levy thresholds.
The revenue implications over the forward estimates are provided in the
Explanatory Memorandum. The government is expected to forego income tax
revenue of $660 million over the forward estimates, due to the increased
income tax thresholds that are proposed for the MLS. The Budget also forecasts
a decrease in expenditure of some $959.7 million, from a reduction in
the 30 per cent private health insurance rebate, due to an expected decline
in private health insurance membership over the period.[19] Overall the government forecasts a net saving of some $299 million
from this measure.
As noted previously, these estimates over the forecast period 2009–2012,
have been questioned by the AHIA and the AMA.
Items 1 and 2 proposes to amend the reportable fringe benefits
threshold provisions contained in subsections 6(1) and 6(2) of the A
new Tax System (Medicare Levy Surcharge—Fringe Benefits) Act 1999,
so that the family income threshold amount is increased from $100 000
to $150 000, and for each dependent child the income threshold increases
by $1 500.
Item 3 proposes to amend the reportable fringe benefits threshold
provisions contained in paragraph 12(1)(a) of the A new Tax System
(Medicare Levy Surcharge—Fringe Benefits) Act 1999, so that for individuals
the income threshold amount is increased from $50 000 to $100 000.
Item 4 proposes to repeal the meaning of ‘family surcharge
threshold’ contained in section 3A of the Medicare Levy Act 1986,
and replaces it with a new section with the family surcharge threshold
amount for a year of income increased from $100 000 to $150 000.
Item 5 proposes to amend subsection 8(B)(2) of the Medicare
Levy Act 1986, so that for unmarried individuals without dependents
the Medicare levy surcharge threshold is increased from $50 000 to
$100 000.
Item 6 proposes to amend subsection 8E(2) of the Medicare Levy
Act 1986, so that for individuals who are beneficiaries of trust income
the threshold is increased from $50 000 to $100 000.
Item 7 specifies that these amendments would apply to income tax
assessments for the 2008–09 financial year and later years of income.
Concluding
comments
The Bill proposes amendments to increase the income threshold amounts
above which taxpayers without appropriate private health insurance are
liable to pay the Medicare levy surcharge. These thresholds have remained
unchanged since 1997. The proposed income threshold amount for individuals
is $100 000, and for families and couples it is $150 000.
The proposed changes have been contentious because of concerns that this
will lead to an exodus of members from private health insurance, because
those taxpayers on incomes below these thresholds will no longer be liable
for the surcharge. Critics are concerned that such an exodus of membership
will have negative consequences for health insurance funds, increase pressure
on premium rises and adversely impact on the public hospital sector. However,
others argue that the changes are unlikely to lead to these outcomes.
The government argues that the changes to the thresholds will ease cost
of living pressures on families on modest incomes.
[5]. Australian Medical Association (AMA), ‘Budget private
health changes will hurt’, media release, AMA, Barton, ACT, 14 May
2008, http://www.ama.com.au/web.nsf/doc/WEEN-7EM4EC,
accessed on 19 May 2008; Australian Health Insurance Association (AHIA),
‘Hundreds of thousands to join public hospital waiting lists’,
media release, AHIA, Deakin, ACT, 10 May 2008; Danielle Cronin, ‘Medicare
changes could push up private health fees’, Canberra Times, 13 May
2008, p. 6.
[6]. Hon. Wayne Swan (Treasurer), ‘Address to the National
Press Club’, media release, Canberra, Parliament House, Canberra, 14 May
2008; see also Budget estimates on savings contained in Australian Government,
‘Part 1: Revenue Measures’ Budget Paper no. 2: Budget Measures 2008-09,
Commonwealth of Australia, Canberra, p. 33.
[10]. NIB Chief Executive, Mark
Fitzgibbon, as reported in J. Breusch, ‘Industry mulls Labor surcharge
shake-up’, Australian Financial Review, 22 November 2007, p. 17.
[11]. L. Russell, ‘Unclear bill
of health in extra sticks and carrots’, Canberra Times, 13 May
2008, p. 13.
Amanda Biggs
4 June 2008
Bills Digest Service
Parliamentary Library
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