Edited version of your written advice

Authorisation Number: 1012907622006

Date of advice: 6 November 2015

Ruling

Subject: Medicare levy surcharge

Question

Are you liable for the Medicare levy surcharge?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You are a member of the Defence Force and have full medical cover as a Defence Force member.

Your spouse is not a member of the Defence Force and has private hospital cover. Your child also has private hospital cover.

Your family income is over the Medicare levy surcharge threshold.

Relevant legislative provisions

Income Tax Assessment Act 1936 Sections 251R to 251VA.

Medicare Levy Act 1986 Sections 8B to 8G.

Detailed reasoning

Taxpayers without adequate private patient hospital cover through health insurance are liable to pay an additional Medicare levy surcharge if their income for Medicare levy surcharge purposes exceeds the relevant threshold.

The Medicare levy surcharge is imposed by sections 8B to 8G of the Medicare Levy Act 1986 (MLA).

Section 8D of the MLA provides for the imposition of the Medicare levy surcharge in relation to a "person who is married during whole or part of the financial year" and states:

(1) This section applies to a person during a period if during the whole of the period:

(a) the person is a married person; and

(b) the person or at least one of the person's dependants (other than a dependant who is, or would, apart from subsection 251U(2) of the Assessment Act, be taken to be, a prescribed person) is not covered by an insurance policy that provides private patient hospital cover; and

(c) the person is not, or is taken under section 251VA of the Assessment Act not to be, a prescribed person.

(2) For the purposes of paragraph (1)(b), a person to whom section 251VA of the Assessment Act applies is taken to be covered during the whole of the period by an insurance policy that provides private patient hospital cover.

Where a person satisfies all the above tests for the whole of the year of income and their combined family taxable income exceeds the relevant threshold, they will be liable for a surcharge in addition to the amount of Medicare Levy otherwise payable.

Under section 251T of the Income Tax Assessment Act 1936 (ITAA 1936) a taxpayer who qualifies as a prescribed person during the income year is entitled to full or partial exemption from the Medicare levy. A prescribed person includes Defence Force members, a person entitled under veterans' entitlement (repatriation) legislation to full free medical treatment, blind pensioners, sickness beneficiaries and foreign government representatives.

To qualify for full exemption from the Medicare levy the prescribed person must either have no dependants or all dependants must also be prescribed persons. Only a partial exemption from the Medicare levy will be available to a prescribed person who has any dependants that do not qualify as a prescribed person. This partial exemption, under subsection 251U(3) of the ITAA 1936, means that the prescribed person shall be exempt for only one-half of the relevant period and thus liable for one-half of the levy.

Notwithstanding the above, subsection 251R(6B) of the ITAA 1936 states that some categories of prescribed persons will be deemed as having no dependants, and thereby fully exempt from the Medicare levy, where their dependants are personally liable for the Medicare levy on separate income.

However, exemption from the Medicare levy does not automatically entitle a prescribed person to exemption from the Medicare levy surcharge. The surcharge operates as an additional amount of Medicare levy rather than as a separate charge and consequently, is based largely on existing Medicare levy provisions.

There are several important differences between the application of the normal Medicare levy rate and the additional surcharge amount in relation to prescribed persons. These changes were introduced to place prescribed persons on the same footing as taxpayers generally in relation to liability to the surcharge.

Section 251V of the ITAA 1936 reverses, for Medicare levy surcharge purposes, the operation of the relieving provisions in section 251R which deem a person not to be a dependant of a taxpayer. This means that, for levy surcharge purposes, the exceptions in subsections 251R(4), (5), (6B), (6C) and (6D) are disregarded and the child or person is taken to be a dependant of the prescribed person.

Under section 251VA of the ITAA 1936 the special rule in subsection 251U(3) which treats a taxpayer as a prescribed person for one-half of the period where the taxpayer has a dependant who is not a prescribed person does not apply. That is, for surcharge purposes, the taxpayer is taken not to be a prescribed person at any time during the period.

Amendments made to the MLA under subsection 8C(2) and 8D(2) provide that a person who is taken not to be a prescribed person during the whole of the period under section 251VA is deemed to be covered by private patient hospital insurance during the whole of the relevant period.

Chapter 2 of the Explanatory Memorandum of the Medicare Levy Amendment Act 1997 confirms the above and states:

2.26 New subsection 8D(2) provides that a person to whom new section 251VA [item 4 of Schedule 1, PHI Bill] applies (that is, a prescribed person who is taken not to be a prescribed person for the purposes of the surcharge) is never the less taken to be covered during the whole of the period by the required private patient hospital cover. This is because such a prescribed person receives full free medical treatment. These persons would not benefit from taking out hospital insurance and are therefore taken to have the required hospital cover. The overall effect of the subsection and new paragraph 8D(1)(c) is that a person who is ordinarily a prescribed person will be liable for the surcharge only where one of his/her dependants does not have the required hospital cover and is not a prescribed person. In this way a prescribed person faces the same incentives to take out private patient hospital cover in respect of dependants as does a non-prescribed person.

In your case, as you are a member of the Defence Force and entitled to full medical treatment, you are deemed to be covered by private patient hospital insurance for Medicare levy surcharge purposes. Your spouse and child both have private hospital cover.

Even though you are over the family threshold for Medicare levy surcharge purposes, you are not liable for the Medicare levy surcharge as you and your dependents all have the appropriate level of private patient hospital cover for the 2014-15 financial year.