How Does The Private Health Insurance Rebate Work?

Published: August 7, 2017

Every year, tax season descends with its usual mayhem and confusion, and while health insurance might not be the first thing that you think about when it comes to your taxes, it can play an influential role in your annual taxable income.

Know your rebate

  • What is it
  • Are you eligible
  • How to claim

Receive your rebate

  • How to calculate
  • Rebate tiers
  • Rebate thresholds

Save on taxes

  • Avoid MLS
  • Avoid LHC loading
  • FAQs

This article will help you understand how the Australian Government rebate on private health insurance works, which rebate tier you fall under, how to avoid penalties and save.

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The Australian government rebate on private health insurance

Health insurance is more closely related to your annual income tax than you might think and you could even pay less with the rebate on private health insurance.

Why was the rebate created?

When more people purchase private health insurance, it reduces the burden on the public healthcare system and increases the affordability of private health insurance for everyone. To encourage people to take private cover, the Australian Government created the private health insurance rebate as an incentive.

What is the rebate on private health insurance?

The private health insurance tax rebate is simply a percentage of the cost of your premiums that the government will pay for you, up to a maximum of 34.579%. This amount depends on your taxable income, your age, and how many dependent children you have.

Depending on the tier you fall under, your rebate could be:

Base Tier 25.934% 30.256% 34.579%
Tier 1 17.289% 21.612% 25.934%
Tier 2 8.644% 12.966% 17.289%
Tier 3 0% 0% 0%
Source: The Department of Health rebate eligibility from 1 April 2017

You are eligible to receive the rebate if you

  • Have an income that is less than the Tier 3 threshold: Less than $140,001 for singles and less than $280,001 for families and couples AND
  • You pay private health insurance premiums: Meaning you have private hospital insurance, extras insurance, or a policy that combines both.

Not all private health funds guarantee eligibility for the Australian Government rebate. You need to check with your health insurer to see if they are registered, if they provide hospital cover or packaged hospital and extras cover, and if the policy that you have chosen is eligible for the rebate.

How to claim your rebate

Whether you pay your premiums fortnightly, monthly, or yearly, there are two ways to claim private health insurance tax rebate:

  1. From your health fund or
  2. From the Australian Taxation Office (ATO)

Who is ATO?

ATO is the Australian Government statutory agency which acts as the main revenue collection body for the Government. Among other duties, they are also responsible for administering the Australian federal taxation system.

If you would like to find an easy, online tool to work out your entitlement to a rebate and the percentage you can claim, you can simply visit the private health insurance rebate ATO website and use their tax rebate calculator.

Choose how you’ll claim your rebate:

1. From your health fund

You can receive your rebate claim as a reduction in your premiums. To do this, you must register with your fund for the rebate as a premium reduction, which you can do by filling in an application form available from your health insurer (usually via their website), and email, fax, or post the completed form back to your insurer.

2. From ATO
Request a statement from your health fund at the end of the financial year and submit this statement with your tax return to ATO. Remember to submit these forms before the 31st of October.

You can either lodge your paper tax return by mail and receive a refund within 50 business days or if you want to receive your refund faster (generally within two weeks) then lodge your tax return online with myTax. Take note; you need to setup a myGov account to use myTax.

How do I receive my rebate?

How you receive your rebate will depend on whether you chose to claim it as a reduced premium or as part of your annual income tax return.

  • If you chose to receive your rebate from your health fund, you would receive it in the form of reduced premiums, meaning you’ll pay less on your premiums every month (or however you pay your premiums).
  • If you prefer to receive your rebate from ATO, then it will be taken off your annual income tax amount so that you pay less taxes for the year.
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Calculate your private health insurance rebate

The rebate is income tested, which means that your taxable income determines your level of rebate for private health insurance. There are 4 levels, the Base Tier is for the lowest income earners, and Tier 3 is for the highest.

How is my rebate calculated?

The Australian Government calculates the rebate percentages based on a weighted average ratio. This is determined using a formula which considers growth in the Consumer Price Index (CPI) and the industry weighted average premium increase.

  1. Estimate your household income for the financial year to work out which of the rebate tiers you fall under.
  2. Next, you must cross reference your tier level with the age of the oldest person on the health insurance policy, and this will give you the rebate percentage you are eligible for.

Health insurance rebate tiers

Tier Under 65 years 65 to 69 years 70+ years
Base Tier 25.934% 30.256% 34.579%
Tier 1 17.289% 21.612% 25.934%
Tier 2 8.644% 12.966% 17.289%
Tier 3 0% 0% 0%
Source: The Department of Health rebate eligibility from 1 April 2017

What happens if you choose the wrong tier?

If you’ve chosen to receive your rebate from your insurer in the form of reduced premiums, then you will be asked to select the tier you think that you’ll fall under, based on your estimated income. But, what if you get it wrong and choose the wrong tier?

If you choose the wrong tier and receive a higher rebate than you are entitled to, you won’t have to pay a penalty. You will, however, incur a tax liability, meaning the difference will be worked out when you put in your tax return at the end of the financial year, and you will pay tax to the ATO or receive a smaller refund than you might have received.

Health insurance rebate thresholds

When it comes to couples and families, your level of rebate is based on a combined income and the age of the oldest person covered under the insurance policy. It’s important to know that if you’re part of a family with children, then the income threshold for each tier will increase by $1,500 for every child after your firstborn.

If your income is higher than $140,000 as a single or $280,000 as a family or couples, then you most likely won’t be eligible to receive a rebate. The lower your income and the older you are, the higher your rebate percentage.

Private health insurance rebate thresholds for 2017

Tier Income Threshold Percentage private health insurance rebate you receive back
Base Tier Single: $90,000 or less
Family: $180,000 or less
25.934% 30.256% 34.579%
Tier 1 Single: $90,001 to $105,000
Family: $180,001 to $210,000
17.289% 21.612% 25.934%
Tier 2 Single: $105,001 to $140,000
Family: $210,001 to $280,000
8.644% 12.966% 17.289%
Tier 3 Single: $140,001 or more
Family: $280,001 or more
0% 0% 0%
Source: The Department of Health rebate eligibility from 1 April 2017

To help you submit your taxes as accurately as possible, your health fund will supply you with a statement at the end of the financial year.

Save with your health insurance tax rebate

Not many people are aware of how much they can get out of their annual tax dollars by getting private health insurance. For instance, some premiums are lower than the Medicare Levy Surcharge, so it might be a good idea to get hospital cover early, avoid this extra charge as well as the Lifetime Health Cover penalties.

Let’s not forget that with private health cover you can access the public hospital system, while still enjoying more choice of when and where you have treatment – without stressing about the lengthy public hospital waiting lists.

Avoid the Medicare Levy Surcharge

You can save up to 1.5% in tax by avoiding the Medicare Levy Surcharge (MLS). The MLS is an additional tax amount payable by Australians who earn over a certain amount and don’t have private health cover. You can avoid this extra charge by taking out private health insurance.

Medicare Levy Surcharge by income tier:

Description Base Tier Tier 1 Tier 2 Tier 3
Singles $90,000 or less $90,001 to $105,000 $105,001 to $140,000 $140,001 or more
Families $180,000 or less $180,001 to $210,000 $210,001 to $280,000 $280,001 or more
Medicare Levy Surcharge % 0% 1% 1.25% 1.5%
Source: The Department of Health rebate eligibility from 1 April 2017

Remember, you are still required to pay the Medicare Levy, which is different to MLS. The Medicare Levy is what most Australians pay through their income tax as a way for the Government to fund Medicare and decrease public hospital waiting times by encouraging taxpayers to take out private cover and use the private hospital system if they can. You cannot avoid paying the Medicare Levy.

Avoid the Lifetime Health Cover loading

You can prevent your taxes from increasing by 2% by avoiding the Lifetime Health Cover loading. This is a government penalty imposed on people who don’t take out private health cover by the 30th of June following their 31st birthdays.

If you don’t have hospital cover before this time, and then decide to take out hospital cover, you will pay an additional 2% of your hospital cover premium for every year that you did not take out hospital cover, up to a maximum of 70%.

Lifetime Health Cover loading example

If you are 31 years old and do not yet have private health insurance, then a 2% LHC loading will apply. When you then do decide to take up private health cover, let’s say for a premium or $2000 per year, will pay $40 extra.

However, this 2% increase is added every year from your 31st birthday. So, let’s assume you decided to take up private health cover at age 37, by the time 1 July passes your policy that would have cost around $2000 per year, will now inlcude an additional 12% LCH loading, requiring you to pay $240 on top of the base premium.

Does the Lifetime Health Cover loading ever go away?

Yes, there is a way to get rid of the Lifetime Health Cover loading. You must take out private hospital cover and maintain your cover for 10 consecutive years.

This does not mean that you must keep the same level of cover or stay with the same insurer for those 10 years. It merely means that your policy must cover you for hospital treatments, even if it’s the most basic policy, and there can be no break in your cover. If you want to change insurers, then you simply arrange for your new policy to kick in as your old policy end.

FAQs: Australian Government rebate on private health insurance

To claim your spouse’s health insurance rebate all you need to do is include his or her details in the spouse details section of your tax return. This means that if you have a spouse on 30 June, then your rebate will be income tested on your combined income, meaning you must include your spouse’s details and income when submitting your tax return.

The health insurance rebate is reduced by the formula that the Government uses to calculate the rebate percentages. This formula considers growth in the Consumer Price Index (CPI) and the industry weighted average premium increase. So, if health insurance premiums increase above the CPI, then the Government’s contributions will get less each year.

Also, because this formula involves calculating the rebate at an industry level, even if your premiums haven’t increased, your rebate percentage will still be reduced. This has been the case since 2014 when the Government started indexing the private health insurance tac rebate based on a maximum of the yearly CPI.

Yes, you will get taxed if you don’t have health insurance. This is applied through a 2% tax increase from the Lifetime Health Cover loading which applies once you have turned 31 and the 30th of June occurring after your birthday has passed, as well as up to 1.5% more in taxes through the Medicare Levy Surcharge.

There are some people who don’t qualify for Medicare treatment and therefore don’t need to pay the Medicare Levy, like Norfolk Island residents and low-income earners. There are also some who will receive a reduced rate, but this depends on their income level and age.

Not only does private health insurance help you avoid additional tax charges while providing you with a tax rebate, but it also enables you to care for your health and the health of your family.

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Ask an Expert?

2 Comments

  • Barry Foote |

    How does the ATO collect the Lifetime Health Cover Loading? Is it debited on annual assessment or is adjusted through premiums/rebate?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Barry.
      Great question.

      I assume you purchased private health insurance after you turned 31. The yearly 2% LHC loading will be added on top of your health insurance premium. The way ATO collects this by not including the loading in your private health insurance rebate.

      For example, let’s suppose your health insurance premium is $220, however 10% ($20) of it is your Lifetime health cover loading. The premium amount that is eligible for the rebate is then $200 and not $220.