Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2011

Bills Digest no. 22 2011–12

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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.

Amanda Biggs
Social Policy Section
22 August 2011

Contents
Purpose
Background
Financial implications
Key provisions
Concluding comments


Date introduced:  7 July 2011
House:  House of Representatives
Portfolio:  Treasury  
Commencement:  At the same time that Schedule 1 of the Fairer Private Health Insurance Incentives Act 2011 commences.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

This Bill proposes amendments to the Medicare Levy Act 1986, which would specify that a person's liability for the Medicare Levy Surcharge (MLS) would be determined by which of three income tiers applied to them. The MLS is a one per cent surcharge on taxable income imposed on ‘high-income’ earners who do not have appropriate private hospital insurance.

This Bill proposes that from 1 July 2012, the MLS would be increased to 1.25 per cent for a person whose income falls within the proposed income tier 2 thresholds, and 1.5 per cent for a person whose income falls within the proposed tier 3 thresholds. The Bill also proposes transitional provisions that would apply for the 2011–12 income year.

It is one of three Bills that propose amendments to the already existing financial incentives and penalties relating to the purchase of private health insurance. The other two are: the Fairer Private Health Insurance Incentives Bill 2011 and the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2011.

Background

Medicare, Australia's universal national health insurance scheme is part-funded by a 1.5 per cent levy on taxable income. Other than for those on low incomes, all taxpayers are liable for the Medicare levy.

A taxpayer on a higher income who chooses not to purchase private health insurance (PHI) is also liable to pay an additional 1 per cent Medicare Levy Surcharge (MLS). For the 2010–11 income year the income thresholds above which a taxpayer without PHI incurs a MLS liability are set at $77 000 for singles and $154 000 for families (this threshold increases by $1500 for each dependent child after the first).[1]

The MLS is part of a suite of policies introduced by the Howard Government that together were designed to encourage the uptake of private health insurance; the others being the private health insurance rebate and lifetime health cover. The rebate provides those who purchase private health insurance with either an up-front discount, a tax offset or a direct payment, which reimburses part of the cost of the premium. Lifetime health cover adds a 2 per cent loading to the cost of the premium for every year a person declines to purchase private hospital cover, after their 31st birthday.

The proposed provisions in this Bill would increase the MLS for income earners who fall into in the tier 2 and tier 3 income tiers that are proposed in the Fairer Private Health Insurance Incentives Bill 2011. For tier 2 earners the MLS would increase by 0.25 per cent and for tier 3 earners it would increase by 0.5 per cent. In 2011–12, the proposed tier 2 income threshold would be for income over $93 000 for singles ($186 000 for families), and the proposed tier 3 threshold would be for income over $124 000 for singles ($248 000 for families).

This increase to the MLS liability is being proposed to ensure the provisions that are being proposed in the Fairer Private Health Insurance Incentives Bill 2011, are effective. These provisions would introduce a means test on the rebate, which would proportionally lower the amount of rebate for those in the proposed income tiers.

Increasing the MLS for high income earners is intended to act as a deterrent to them dropping their private cover, in response to the reduced rebate.

For further background relating to the whole measure, including details of positions of major stakeholders and explanation of key issues, refer to the Bills Digest for the Fairer Private Health Insurance Incentives Bill 2011.

Financial implications

The financial impacts of the provisions in this Bill are not able to be disaggregated from the financial impact of the measures contained in the Fairer Private Health Insurance Incentives Bill 2011.

Key provisions

Schedule 1

Amendments to the Medicare Levy Act 1986

Items 1 and 3 propose meanings for family tier 1 and singles tier 1 thresholds respectively that are aligned with the meanings of these in the Private Health Insurance Act 2007.

Items 4 and 5 insert definitions of tier 2 and tier 3 earners respectively.

Item 6 aligns the tier 2 and tier 3 earner definitions with meanings of these in the Private Health Insurance Act 2007 and specifies the corresponding year of income.

Items 7 and 9 replaces the descriptions of singles and family thresholds with single's tier 1 threshold and family tier 1 threshold.

Item 8 proposes the level of increase in MLS to apply to tier 2 and 3 earners. For a singles tier 2 earner the MLS would increase by 0.25 per cent; and for a singles tier 3 earner it would increase by 0.5 per cent.

Item 10 proposes the same proportional increases for families designated as being in tiers 2 and 3.

Item 24 proposes transitional arrangements to apply for the 2011–12 year of income.

Concluding comments

This is one of three Bills which propose to implement measures that will change the penalties and incentives relating to the purchase of private health insurance. This Bill would impose a higher financial penalty on higher income earners who opt not to purchase PHI. It proposes to proportionally increase the liability for the MLS for those income earners designated as falling into new income tiers that are proposed in a related Bill.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2724.



[1].       Australian Taxation Office, 'Guide to Medicare levy: Medicare levy surcharge', webpage, viewed 5 August 2011, http://www.ato.gov.au/individuals/content.aspx?doc=/content/00250854.htm&page=11

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