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Staying below the medicare levy surcharge threshold

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From reading the information on the Medicare levy surcharge, once you reach the $90,000 income threshold with no private health insurance, you will be charged 1% of your entire pre-tax income, which will be roughly $900, assuming no other income or deducations. This seems to work differently to the actual income tax brackets, where the additional tax on each bracket is only charged on the amount you are above that bracket. For example, there is a tax bracket in 2019–20 for $90,000, but if you earn $90,001 anually, only that $1 will be charged the 37% income tax rate. Is this correct?

 

If this is correct, then for someone earning $91,000, any salary reductions/salary sacrifices that can reduce their salary to $89,999 are almost "free", because they will reduce their income to below the surcharge threshold, and thus save $910 at the cost of reducing their salary by $1001. So, for the "cost" of $91 ($1001 - $910), they can get $1001 worth of salary sacrifices. Is this correct?

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Hi @Migwell

 

Welcome to our Community.

 

You are right to identify that the way the Medicare levy surcharge (MLS) is calculated (and the Medicare levy) is quite different to the way that your tax is calculated. This is why they are shown as separate amounts on the notice of assessment (NOA).

 

As you would have read, the MLS is levied on Australian taxpayers who do not have an appropriate level of private patient hospital cover and earn above a certain income. We use a special definition of income (called income for MLS purposes) to determine whether you are liable to pay the MLS, and the rate of MLS you will have to pay. This income is different to your taxable income.

 

The $90 000 threshold applies to you if you are single. If you were to take a pay cut (salary reduction) in order to reduce your income for MLS purposes to $90 000 or less then you won't be considered liable for the MLS. This will be because you have taken a pay cut.

 

Reducing your taxable income via a salary sacrifice arrangement may not have the same effect as taking a pay cut. This is because reportable fringe benefits and reportable super contributions (as well as a number of other items) also form part of the income for MLS purposes calculation.

 

In other words, entering a salary sacrifice arrangement may reduce your taxable income but it won’t necessarily reduce your income for MLS purposes.

 

Hope this helps.

 

Thanks,

 

ChrisR

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Best answer

ATO Certified

Community Support

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Hi @Migwell

 

Welcome to our Community.

 

You are right to identify that the way the Medicare levy surcharge (MLS) is calculated (and the Medicare levy) is quite different to the way that your tax is calculated. This is why they are shown as separate amounts on the notice of assessment (NOA).

 

As you would have read, the MLS is levied on Australian taxpayers who do not have an appropriate level of private patient hospital cover and earn above a certain income. We use a special definition of income (called income for MLS purposes) to determine whether you are liable to pay the MLS, and the rate of MLS you will have to pay. This income is different to your taxable income.

 

The $90 000 threshold applies to you if you are single. If you were to take a pay cut (salary reduction) in order to reduce your income for MLS purposes to $90 000 or less then you won't be considered liable for the MLS. This will be because you have taken a pay cut.

 

Reducing your taxable income via a salary sacrifice arrangement may not have the same effect as taking a pay cut. This is because reportable fringe benefits and reportable super contributions (as well as a number of other items) also form part of the income for MLS purposes calculation.

 

In other words, entering a salary sacrifice arrangement may reduce your taxable income but it won’t necessarily reduce your income for MLS purposes.

 

Hope this helps.

 

Thanks,

 

ChrisR