Ultimate guide to private health insurance and tax time

Tax time is something no one looks forward to, especially when you have to figure out what surcharges and rebates might affect you. That’s why so many people hire someone else to take care of their taxes for them!

Having private health insurance can come with some big tax benefits. It can help you save money at the end of financial year (EOFY) while also making sure you and your family are covered in the event of illness or injury. With the rising cost of living, it's a solid idea to save those dollars and handle your tax solo. 

In order to explain, we'll paint a picture of all the moving parts that can impact your tax. Here are the big hitters:

• Medicare levy surcharge (MLS): The MLS is an ‘extra’ tax that many Aussies have to pay if they don’t have an appropriate level of private hospital cover and earn above a specific income threshold. As of the 2023-24 tax year, if your income is higher than $93,000 as a single or $186,000 as a family, and you don't have private hospital insurance, you’ll be footing an MLS bill. It ranges from 1% to 1.5% of your income, depending on how much you earn. Want to avoid it? Make sure you have an appropriate level of private hospital cover.
• Private health insurance rebate: This is a government incentive to make private health insurance more affordable for the everyday Australian. The rebate is income-tested, meaning the amount you get will depend on your income and age. Lower-income earners and older Australians, for example, will get a higher rebate. You can claim it as a reduction in your health insurance premiums throughout the year, or as a lump sum when you lodge your tax return.
• Lifetime health cover (LHC) loading: While not directly related to tax time, it’s worth noting that keeping your private health insurance will help you avoid the nasty LHC loading. If you don't have private hospital cover by 1 July after your 31st birthday, you’ll pay a 2% loading fee on top of your premium for every year you are over 30 when you first take out cover. Put it this way: LHC loading can massively raise your health insurance costs if you are slack about taking out cover.

Whether you’re a single, couple or family, things like the MLS and private health insurance rebate can result in substantial savings come tax time. Say you’re a single person earning $100,000 – avoiding the MLS will save you anywhere from $1,000 to $1,500 in extra taxes. Claiming the rebate will also lower the cost of your premiums (if you’re eligible), which can make private health insurance more affordable even if you’re on a tight budget.

To reap the tax benefits of private health insurance, you'll need to know that your policy meets the criteria set out by the Australian Taxation Office (ATO).

The big issue here is that you want to avoid paying the MLS, so you’ll need to take out an appropriate level of private hospital cover. Bear in mind that this doesn’t include extras-only policies or overseas visitors cover, and it must provide cover for hospital treatment in both public and private hospitals.

You also need to factor in your income threshold. For singles, the threshold right now is $93,000, and for couples and families it’s $186,000. Be aware that the family threshold goes up by $1,500 for every dependent child after your first. If your income is higher than these amounts and you don’t already have private hospital cover, you’ll be lugged with the Medicare levy surcharge.

Then there’s extras cover (which includes things like dental, optical, physiotherapy and more). While this doesn’t explicitly affect your tax, it can be really helpful for covering your ongoing health expenses, especially if you have kids. That being said, remember that extras-only cover won’t help you avoid the MLS – you must have private hospital cover at minimum.

Finally, you’ll want to make sure your private health insurance policy is certified by the Australian Government. Pretty much every Australian health insurer you research will sell compliant products, but it’s always a good habit to confirm that your policy qualifies. Unless they are dodgy dealers, your insurer will be happy to provide statements indicating the number of days you were covered with private health insurance, which is necessary when you need to lodge your tax return.

Unfortunately, private health insurance premiums themselves aren’t tax deductible. But the benefits of having private cover mean you’ll be able to avoid the MLS and potentially be eligible for the private health insurance rebate.

• Rebate and MLS savings: While you can’t exactly deduct your health insurance premiums from your taxable income, you can receive a rebate that reduces the overall cost of your premiums. Steering clear of the Medicare levy surcharge can also mean you get big savings at tax time, effectively reducing your tax burden.
• Tax offsets: If you choose to get the private health insurance rebate as a tax offset, it will reduce the amount of tax you owe at EOFY.

While the short answer to this question is ‘no’, the longer answer is that the financial incentives from the rebate and the MLS avoidance can essentially provide you with indirect tax benefits.

You might want to put this off as long as possible, but it’s actually easier than you think! This is especially the case nowadays since most health funds send your information directly to the ATO. Here’s a step-by-step guide to ensure you complete the private health insurance section correctly:

1. Retrieve your tax statement: By the third week of July, your health insurer will have sent your private health insurance details to the ATO. You’ll also be able to access your tax statement through your health fund’s online member services portal.
2. Access the private health insurance section: When you’re ready to start filling out your tax return online using myTax, head over to the private health insurance section. Your information should automatically generate if your health fund has sent the details to the ATO. If not, give your insurer a ring and ask them what’s the hold-up.
3. Verify pre-populated information: Check that all the pre-populated details that have been provided are accurate. This includes things like your:
   • Health insurer ID
   • Membership number
   • Premiums eligible for the rebate
   • Rebate received
   • Benefit code
   • Number of days you were covered under a private hospital insurance policy
4. Fill things out yourself (if necessary): If for some reason your details aren’t already pre-populated, you can manually enter the information from your tax statement. Just make sure you enter everything correctly!
5. Tax claim code: The tax claim code relates to the type of rebate you are claiming. For most people, this will be pre-filled. If not, you can find it based on your circumstances (e.g., singles or families). See ‘What’s my private health insurance tax claim code?’ below.
6. Lodge your return: Once you’ve confirmed that all the information is correct, finish off the rest of your tax return and lodge it. How simple was that?

Your health fund will take care of this and send it off to the ATO by around mid-July. If you want to keep an eye on it, simply access your statement through your health fund’s online portal. If you can’t access the portal, request the statement via email or phone from your insurer. It will include all necessary details for completing the private health insurance section on your tax return.

The tax claim code is a letter used to indicate the type of rebate you are claiming on your tax return. It’s usually pre-filled in your online tax return based on the details provided by your insurer. Look out for one of the following codes:

• A: Single adult on 30 June.
• B: Single adult on 30 June (with a dependent child or children).
• C: Have a spouse on 30 June (including if they passed away during the tax year and you didn’t have another spouse before 30 June).
• D: Have a spouse on 30 June and claiming your share of rebate due to spouse not claiming it.
• E: Have a spouse on 30 June and spouse is claiming your share of rebate because you aren’t claiming it yourself.
• F: Dependent child covered under private health insurance and not entitled to get the rebate.

The exact amount of tax savings with private health insurance will swing wildly from person to person, as it’s based on your income and the MLS rate (if applicable). For example, a single person earning $100,000 can save between $1,000 to $1,500 by having an adequate level of private hospital cover. If you are eligible to claim the private health insurance rebate, this can also reduce any out-of-pocket expenses you might be facing.

Tax time and private health insurance don’t have to be complicated – even during the mad rush at EOFY! Now that you know how everything impacts your taxes, you can look for the best level of private hospital cover for your needs.

Just make sure to review your policy every year or so to see that it’s still meeting your healthcare and lifestyle needs.