What’s the deal with health insurance, tax and June 30?

It’s all because of three financial incentives the government introduced over 20 years ago. The idea was to get more people buying hospital insurance and into private hospitals, taking pressure off the public hospital system.

Think about these incentives as two sticks and a carrot.

Your two sticks are the Medicare Levy Surcharge (a tax on high-income earners without hospital insurance), and Lifetime Health Cover loading (it makes hospital insurance more expensive if you’re 31 or over, you don’t have hospital insurance and try to get it later in life).

The carrot is the Australian Government Rebate on Private Health Insurance (makes health insurance more affordable).

Confused? Don’t worry. Here’s what you need to know about health insurance, tax and the June 30 deadline. That way, you can figure out if you need to worry about it, or not.

The first stick—the Medicare Levy Surcharge

If you earn more than $93 000 (or $186 000 for couple or families) and you don’t have hospital insurance, you’ll get hit with the Medicare Levy Surcharge (MLS).

It’s a tax, separate from the Medicare Levy, that sits at 1 – 1.5 percent depending on your income for MLS purposes¹. Your income for MLS purposes is different from your taxable income, so if you think the MLS might apply to you, it’s worth heading to the Australian Tax Office’s website to read up on it. 

Once you’ve got hospital insurance, you’ll only pay the MLS for the part of the financial year you didn’t have it.

What does June 30 have to do with it? Nothing, actually.

You can take out hospital insurance whenever you want to avoid the Medicare Levy Surcharge. Some people take it out by June 30 to have a clean slate for the coming financial year, but that’s entirely up to you.

No matter when you get hospital insurance, you’ll still pay the Medicare Levy Surcharge for the days you weren’t covered during the current financial year, which is why it doesn’t really matter when you get hospital insurance if you want to avoid the tax.

The second stick—Lifetime Health Cover loading

Lifetime Health Cover loading (LHC loading) is an extra cost added to the base price of hospital insurance.

Unlike the MLS, LHC loading is not a tax. It’s an extra amount of money you pay on top of your hospital insurance.

Here’s how it works.

If you’re 31 or older and you don’t have hospital insurance, you’ll get hit by the LHC loading if you buy hospital insurance later in life. When you do take it out, for every year you are over 30, you’ll pay an extra 2 percent for your hospital insurance. The most you'll ever pay in loading is 70 percent.

For example, if you’re 40 and taking out hospital insurance for the first time, you’ll pay 20 percent more than a 30-year-old you.

Most people think you need to get hospital insurance before you turn 30 to avoid the loading—but you have more time than you think.

To avoid the loading, you need to buy hospital insurance on or before 1 July following your 31st birthday

The LHC loading is the only government incentive where the deadline really matters. If you’re even a day over the deadline, you’ll start paying the loading.

The good news is, once you get hospital insurance, the loading stops increasing. That means if you buy it at 32, you’ll only ever pay 4 percent on top of your hospital insurance premium if you maintain your cover.

Once you’ve paid the loading for 10 continuous years, it’s removed. From there, just hold onto your hospital cover so you don’t end up with the loading again.

If, once you’ve served your 10 years, you need to temporarily drop your hospital cover for whatever reason, don’t worry—you’ve got a generous grace period to do things like switch health funds or suspend your membership while you’re overseas without affecting your loading.

The other good news is the loading doesn’t apply to your extras insurance or any other health insurance—it only applies to hospital insurance.

RELATED: Lifetime Health Cover loading FAQs

The carrot—the Australian Government Rebate on Private Health Insurance

If you need to get hospital insurance because of the MLS, the loading, for peace of mind or a combination of all three, the rebate can help make hospital insurance cheaper.

The rebate is a sum of money the government chips in to help make health insurance more affordable for those who are eligible to receive it. It applies to all health insurance, including hospital, extras and ambulance insurance.

There are two ways to get the rebate: apply it to your health insurance premium to bring down the price, or claim it back at tax time.

Your rebate amount works out as a percentage of your health insurance premium. It's means tested, so depending on your age and income, your rebate will be anywhere between 0 – 32.8 percent.

For example, if you’re under 65 and earn less than $93 000, your rebate will be 24.608 percent.

There's a bunch of different rebate brackets for different income and age ranges, which you can check out here.

How do you get the rebate? Easy—just get in touch with your health fund and they’ll help you out.