Health funds want to raise a tax penalty to force you to buy their products

A $900-plus tax penalty to force the rich into buying private health insurance is now hitting those on middle incomes — meaning it’s now cheaper for many to pay the tax, than join a health fund.

A $900 plus tax penalty to force the rich to buy private health insurance is now hitting those on middle incomes.

Worse still, a News Corp Australia investigation has found the 1-1.5 per cent Medicare Levy Surcharge no longer works because skyrocketing premiums mean it’s now cheaper for many people to pay the tax than join a health fund.

Instead of making their products cheaper to fall below the penalty, health funds want the tax slug raised by hundreds of dollars to force more people on average earnings to buy their product.

As ordinary families struggle with low wage growth and rising household bills this is a punishing tax they shouldn’t have to pay.

We asked both major parties to explain when they intend to raise the threshold so the tax penalty returns to its original purpose of targeting the rich.

It’s now cheaper for many Australians to pay the tax than join a health fund. Picture: Istock

The secret tax slug works a little like bracket creep in the tax system.

As inflation rises and wages grow, people are pushed over the income threshold at which the tax penalty applies.

And that threshold is now so low it’s hitting earnings of $90,000 — the average wage for men — and average combined family salaries of $180K where mums and dads are employed as teachers, nurses or police.

Singles who earn more than $90,000 a year have to pay a tax penalty starting at $900 a year of they don’t have health insurance.

Families who earn over $180,000 a year, for example — a police sergeant married to a Level 2 teacher — have to pay a penalty that starts at $1800 if they don’t have health cover.

The problem is health fund premiums are now so expensive they cost more than the penalty.

The cheapest basic health fund policies offered by Medibank and Bupa for singles earning over $90,000 a year cost $1119 and $1099 and for families $1906.80 and $2027.

We asked insurance brokers iselect and Compare the Market if they could find policies that cost less than the surcharge.

A News Corp investigation has revealed the reality of health insurance costs for Australians. Picture: iStock.

“While we don’t have policies available for less than $900, if you earn above $95,000 then taking out a basic hospital policy will generally cost less than paying the MLS,” Iselect’s Laura Crowden said.

Compare the Market said some health policies were cheaper than the surcharge only when the full 25 per cent Government rebate applied, people earning over $90,000 do not get the full rebate.

Australian Taxation Office statistics show in 2016 nearly 196,000 Australians were hit by the surcharge with the average amount paid was over $1300 a year.

Tax accountants Hand R Block said the decision to take out health cover was about more than dollars and cents.

“But with steadily escalating premiums — as your research shows — it’s now almost impossible for many taxpayers to find a policy that will actually cost less than the MLS.

“So, instead of encouraging people to take out private health, the MLS is almost having the opposite effect as people work out they can pay less by paying the surcharge than they would by taking out (or maintaining) private health insurance,” the firm said.

The penalty, introduced by John Howard, was originally designed to hit the rich but the income threshold at which it cuts in was frozen in 2014 until 2021 and it’s now affecting average earners.

Australia’s two largest health funds Medibank and Bupa want the government to look at increasing the size of the levy to provide more incentive for people to buy health cover.

However, HCF said the income level at which the tax penalty applied should be raised “in order to maintain its original intention rather than raising the actual rate”.

Private Healthcare Australian chief Rachel David said “the next government should review the thresholds, I don’t think increased taxes would be productive”.

The Consumers Health Forum has rejected a bid by health funds to raise the size of the Medicare levy surcharge.

“In what is already a taxpayer supported product in the form of the private health insurance rebate, we would not support raising the size of the Medicare levy surcharge as a means of encouraging more people to take up insurance in isolation of an independent review by the Productivity Commission of private health insurance arrangements and their value to both families and our health care system,” CHF CEO Leanne Wells said.

Originally published as Health funds want to raise a tax penalty to force you to buy their products