Edited version of private advice

Authorisation Number: 1052262767391

Date of advice: 27 June 2024

Ruling

Subject: Medicare levy - partial exemption

Question

Is the lump sum payment you received excluded from your taxable income for the purpose of calculating your Medicare levy?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On Date one, you reached compulsory retirement age and were discharged from a Commonwealth agency.

In accordance with your payslip issued on Date two, you were provided with lump sum payments to reimburse your outstanding leave balances as at Date three, at which time you were still a prescribed person. The lump sum payments were paid on the first possible occasion (payment period) which was Date two.

The payslip issued on Date two was authorised and loaded into the relevant payroll system on Date four when you were still a member of the Commonwealth agency.

You received an annual leave lump sum payment and a Long Service Leave payment consisting of two amounts. The first LSL payment was for the period between 19XX and 19XX. The second payment was for the period after 19XX.

The amount of tax withheld from these payments has been worked out on the basis that they are subject to the full Medicare Levy of 2%.

While you were a regular serving member of the Commonwealth agency, you had a full exemption from paying the Medicare Levy as you were a prescribed person and your spouse paid the full Medicare levy.

Relevant legislative provisions

Medicare Levy Act section 6(1)

Medicare Levy Act section 8(2)

Medicare Levy Act section 9

Income Tax Assessment Act 1997 section 251S

Income Tax Assessment Act 1997 section 251T

Reasons for decision

Summary

The lump sum payment you received is not excluded from your assessable income for the purposes of calculating your Medicare levy.

Detailed reasoning

In accordance with section 251S of the Income Tax Assessment Act 1936 (ITAA 1936), the Medicare levy is payable by an individual who is a resident of Australia at any time during the income year, based on their taxable income.

Subsection 6(1) of Medicare Levy Act 1986 (MLA)provides that the rate of levy payable by a person upon a taxable income is 2%.

Prescribed persons

Section 251T of the ITAA 1936 provides an exemption from the Medicare levy for persons who meet the definition of a prescribed person for the whole of an income year. Prescribed persons are listed in section 251U of the ITAA 1936 and includes, but is not limited to, the following categories of persons:

(a)the person was entitled to free medical treatment during the whole of that period in respect of every incapacity, disease or disabling condition because the person was a member of the Defence Force or was a relative of, or was otherwise associated with, a member of the Defence Force; or

(b)the person was entitled under the Veterans' Entitlements Act 1986, the Military Rehabilitation and Compensation Act 2004, the Australian Participants in British Nuclear Tests and British Commonwealth Occupation Force (Treatment) Act 2006 or the Treatment Benefits (Special Access) Act 2019 to free medical treatment during the whole of that period in respect of every incapacity, disease or disabling condition.

The are some other steps in working out a person's prescribed person status, but they are not relevant to you.

Prescribed person for only part of the income year

Where a person is a prescribed person for only part of the income year, there is a proportionate reduction in the amount of basic Medicare levy otherwise payable.

Section 9 of the MLA provides that in the case of a person who was a prescribed person during only part of the year of income, the amount of levy payable by the person is reduced based on the proportion of the income year that they were a prescribed person.

The formula for calculating the reduction is as follows:

Basic Medicare levy × exempt days ÷ days in the year

Application to your circumstances

The lump sum payment you received is assessable in the relevant income year. The period when you were a prescribed person will not be included when calculating any Medicare levy payable. As a result, you will receive a partial exemption based on the number of days you were a prescribed person. This exemption will be calculated using section 9 of the MLA.

Note: The tax withheld by your employer is not the final tax payable by you. It is merely their estimate of the tax liability we will raise in the assessment we issue for you. You will receive a refund from us when your assessment issues if too much tax has been withheld by your employer.