Budget 2017: Medicare levy to knock out taxpayer gains

Scott Morrison’s decision to increase the Medicare levy will more than swallow the gains from the abolition of the deficit levy.

Scott Morrison’s decision to increase the Medicare levy will more than swallow the gains from the abolition of the deficit levy for many high income earners when it kicks in from mid-2019.

The Treasurer has announced the Medicare levy will rise by 0.5 per cent to 2.5 per cent in two years as the government moves to pay for its decision to fully fund the National Disability Insurance Scheme and underpin the nation’s health care system.

The decision — pushed out to beyond the next election — will disappoint taxpayers with incomes between $180,000 and up to $240,000 who will find themselves worse off under the new arrangements when they begin in two years. These taxpayers will however have been able to pocket the gains from the abolition of the deficit levy for two years.

The Medicare levy increase is predicted to reap $3.55bn in 2019-20 and $4.25bn in 2020-21.

But the increase the Medicare levy will also impact on other taxes which are linked to the top personal tax rate such as the fringe benefits tax rate. This is expected to also provide $400m in revenue in 2018-19 meaning the measure will contribute $8.2bn to the budget over the four years of forward estimates.

By contrast the deficit levy, introduced in 14-15 by Joe Hockey raised around $3bn over its lifetime.

When the increased Medicare levy kicks in two years, a single income earner on $100,000 would pay an extra $500 a year in Medicare Levy to a total of $2500, while the cost to a wage earner on $150,000 would be $750 extra and a wage earner with a taxable income of $200,000 would pay an additional $1000.

That same taxpayer on $200,000 would receive a gain of only $400 from the abolition of the end of the deficit levy. The gain from the abolition of the deficit levy doesn’t begin to outweigh the gains from the abolition of the deficit levy until taxable income passes $240,000.

Delivering the budget speech last night Scott Morrison promised to tackle the $55.7bn in unfunded NDIS liabilities over the next 10 years by increasing the Medicare Levy “when the extra bills start coming in’’.

In a bid to shelter the lowest income earners from the impact of the rise in the Medicare levy, the Treasurer announced the lower income thresholds below which the Medicare threshold will not be charged would be increased to $21,655 for singles, $36,541 for families plus $3356 for each dependent child or student.

The single income threshold for pensioners or seniors would be $34,244 and the family threshold for seniors and pensioners would be increased to $47,670 plus $3356 for each dependent child or student.

Treasury officials said above these thresholds the Medicare levy would kick in a 10c in the dollar until an taxpayers income reached about $50,000.

The budget also contains a crackdown on the black economy and particularly targets contractors in the courier and cleaning industries.

The government hopes to raise $318m over four years by requiring businesses to report payments to contractors to the ATO in line with a scheme that is in use in the building and construction industry.

Overall income tax receipts were forecast to grow by 2.9 per cent in 2016-17 and 4.7 per cent in 2017-18.

However compared with the mid-year-economic fiscal outlook income tax receipts were expected to be $700m lower in 2016-17 and $1.8bn lower in 2017-18 and $4.3bn lower over the four years to 2019-20.

Treasury said the reductions over the four years to 2019-20 was primarily due to downward revisions to aggregate wages forecasts.

However the fall would be partly offset over the forward estimates by the decision to increase the Medicare levy.

Other taxes such as unincorporated business profits, capital gains and interest were also lower than predicted and the midyear economic review. They were expected to be $700m lower in 2016-17 than estimated but $700m higher in 2017-18 and $1.6bn higher over the forward estimates to 2019-20.

The increased revenue projections over the forward estimates were underpinned by higher expected growth in unincorporated business income over the forward estimates.