Bills Digest no. 121 2007–08
Tax Laws Amendment (Medicare Levy Surcharge Thresholds)
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
Contact officer & copyright details
Tax Laws Amendment (Medicare Levy
Surcharge Thresholds) Bill 2008
introduced: 27 May
House: House of Representatives
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
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
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.
This measure was officially announced in the 2008 09
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 . 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
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. 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. 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.
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 .
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
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. 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.
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
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
Opponents of the changes also argue that the proposed changes
will lead to higher private health insurance premiums. 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. 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
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. 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
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
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, 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. 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.
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
The government argues that the changes to the thresholds will
ease cost of living pressures on families on modest incomes.
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.
. 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.
. NIB Chief
Executive, Mark Fitzgibbon, as reported in J. Breusch, Industry
mulls Labor surcharge shake-up , Australian Financial
Review, 22 November 2007, p. 17.
Russell, Unclear bill of health in extra sticks and carrots ,
Canberra Times, 13 May 2008, p. 13.
4 June 2008
Bills Digest Service
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