Chapter 2
The bill and the Medicare Levy Surcharge
2.1
The Tax Laws Amendment (Medicare Levy Surcharge Thresholds) Bill
2008 increases the Medicare Levy Surcharge (MLS) thresholds from annual taxable
incomes of $50 000 to $100 000 for individuals and from $100 000
to $150 000 for families and couples. The increased thresholds will apply
from the 2008–09 year of income. For 2008–09 tax returns, therefore,
individuals taxpayers earning $100 000 and under will not be liable to pay
the MLS.
2.2
To give effect to these changes, the bill amends subsections
6(1), 6(2) and paragraph 12(1)(a) of the A New Tax System (Medicare Levy
Surcharge—Fringe Benefits) Act 1999 and subsections 3A, 8B(2) and 8E(2) of
the Medicare Levy Act 1986.[1]
2.3
Medicare is partially funded through the Medicare levy.[2]
It is currently set at 1.5 per cent of taxable income with an exemption for low
income earners adjusted regularly to account for changes in the consumer price
index (CPI). The MLS is not hypothecated. In 2005–06, revenue from the Medicare
levy was $6.1 billion while the surcharge raised $0.3 billion. The overall cost
of Medicare in 2005–06 was $16.4 billion.[3]
2.4
Currently, the Medicare levy surcharge is an additional one per
cent of taxable income imposed on those who do not have private health insurance
(PHI) and who earn over $50 000 per annum (over $100 000 for couples
and families). If the bill is passed, a single person without private health
insurance on the average annual salary of $58 600 would therefore save
$586 a year.[4]
2.5
If the MLS had been indexed to the CPI since it was introduced on
1 July 1997, the threshold would now be $67 000 per annum; if it was
indexed to average weekly earnings, it would be now be set at $76 000 per
annum.[5]
Australian Taxation Office figures show that in 2005–06, 465 325 taxpayers
incurred the surcharge, up from 436 490 in 2004–05 and only 167 330
in 1997–98.[6]
2.6
The policy intent of the MLS is as follows:
The surcharge aims to encourage individuals to take out private
hospital cover, and where possible, to use the private system to reduce the
demand on the public system.[7]
2.7
When the MLS was introduced in 1997, it was targeted at high
income earners. The then Treasurer, the Hon. Peter Costello, told the House in
August 1996:
...higher income earners who can afford to take out private health
insurance will also be encouraged to do so...This is the levy which the
Government hopes no-one will pay. It is entirely optional. Those who take out
health insurance (with the benefits attached) will be exempt.[8]
2.8
Professor John Deeble, the principal architect of the Medicare
system in the 1980s, noted in his submission to this inquiry the unusual nature
of the surcharge:
The surcharge is an income-related tax. However unlike almost
any other income-based tax, it operates in a reversionary way – that is, it
applies to all the taxable income of people earning above the thresholds, not
just to the excess. I know of no other tax that works in this way and it is
extraordinary that an Australian parliament should have approved it. The result
is a very high marginal tax rate for people with incomes at or close to the
thresholds.[9]
2.9
As the average income is now $58 600 per year it should be
noted that an increasing number of taxpayers close to the threshold are bearing
a disproportionate amount of the MLS, and that this is neither equitable nor in
keeping with the original intent of the policy.
2.10
The MLS was introduced in 1997 as part of a suite of policies to
encourage membership of private health funds. In 1999, the Commonwealth
Government implemented a 30 per cent rebate on private health insurance premiums.
For people aged between 65 and 69 years, the rebate is 35 per cent; for those
aged over aged 70 years, it is 40 per cent.[10]
In 2000, legislation was passed limiting any front end deductible (excess) to
$500 for singles to qualify for surcharge exemption. In 2001, the Commonwealth
introduced the Lifetime Health Cover scheme. The scheme imposes a two per cent
annual cumulative loading (up to 70 per cent) to the cost of private health premiums
for people who only take out health insurance after their 31st
birthday. For example, a person who first joined a private health fund at the
age of 45 will pay a 28 per cent higher premium (14 years x 2 per cent) than a
person who joined at the age of 31.
2.11
The MLS threshold levels have not changed since they were
introduced. The Assistant Treasurer, the Hon. Chris Bowen, noted in the Second
Reading Speech that when the surcharge was introduced by the Howard government,
the policy was targeted at high-income earners. He explained that the bill:
simply increases the thresholds to an income level around which
they originally applied in 1997...around 8 per cent of single taxpayers are
estimated to have exceeded the Medicare levy surcharge threshold in 1997‑98,
when it was introduced...this proportion will be restored to around 8.5 per cent
– at the end of the forward estimates – of single taxpayers likely to exceed
the new singles threshold in three to four years.[11]
2.12
In explaining the rationale for the bill, Mr Swan described the
current $50 000 threshold as a 'tax trap'. He added:
I think the private health industry should have more confidence
in their product. We are a supporter of private health insurance and we have
supported the 30 per cent rebate and the variations to it as it runs up the
scale and we will continue to do that. But you cannot support it with this sort
of compulsory taxation, on a group of people who don't deserve to be hit for
six, the way they were hit for six.[12]
2.13
The Medicare levy surcharge, the 30 per cent private health
insurance rebate and the Lifetime Health Cover arrangements are a combination
of 'carrots' and 'sticks' to encourage PHI membership. The private health
insurance industry argues that these three 'pillars' are essential to maintain
a 'balance' between public and private health care, and to support Australia's
unique system of community rating in private health insurance.
2.14
However, these 'pillars' are expensive to maintain. Those who
hold private health insurance currently receive generous tax breaks even before
the exemption from the MLS. Table 2.1 shows that in 2006–07, the cost to the
taxpayer of the 30 per cent private health insurance refund was higher than the
tax concessions given to the total manufacturing sector.[13]
Table 2.1: Tax concessions
2006–07 (30% PHI rebate & selected industries)
|
|
30 per cent
PHI
rebate
|
Manufacturing
|
Primary production
|
Mining
|
|
Tax concessions 2006–07
($ million)
|
980
|
963
|
192
|
131
|
Source: Tax Expenditures
Statement 2007; Trade and Assistance Review 2006–07, Productivity Commission
2.15
Table 2.2 shows that the level of private health insurance
increased in all states between 1996 and 2001. Membership levels have remained
fairly steady since 2001. Many attribute the jump in PHI membership to the
success of the 'Run for Cover' marketing campaign prior to the introduction of
Lifetime Health Cover arrangements.[14]
Table 2.2: Percentage of
population in private health insurance, 1996–2008
|
|
WA
|
NSW
|
SA
|
Vic
|
Tas
|
Qld
|
|
March 2008
|
49.7
|
46.0
|
44.5
|
43.3
|
43.0
|
42.1
|
|
March 2001
|
48.2
|
45.8
|
45.7
|
45.1
|
44.3
|
42.4
|
|
Sept 1996
|
36.7
|
33.9
|
34.0
|
33.2
|
36.7
|
31.1
|
Source: Private Health Insurance Administration
Council, Industry statistics.
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